2022 MARKET OUTLOOK Is the Buffett Indicator Pointing to Another Lost Decade? By Will Nasgovitz HEARTLAND ADVISORS After almost two years of seem-Nominal S&P 500 10-YR Annualized Total Return ingly uninterrupted gains in everything from large growth stocks to crypto cur-21.0% rencies and the blockchain-born art 18.0% known as NFT (non-fungible token), 15.0% investors would be wise to step back and 12.0% look at valuations before throwing more 9.0% money at some of the latest and greatest. 6.0% We’d suggest a simple one to start—the 3.0% Buffett indicator. 0.0% Named after Warren Buffett, the -3.0% measure looks at the market value of vir--6.0% tually all publicly traded U.S. businesses 1812 1827 1842 1857 1872 1887 1902 1917 1932 1947 1962 1977 1991 2006 2021E relative to the gross domestic product. Source: Stifel and Barry Bannister. Monthly data from 1802 to present. Data sourced from 1802-1871: www.nber.org/system/files/ During the past few months, readings working_papers/w2985/w2985.pdf; from 1871 to present: Format Stifel Equity Strategy. Large Cap U.S. Stocks from www.econ.yale. edu/~shiller/data.htm G. William Schwert; from 1947-present: for CPI inflation “Historical Statistics of the United States, Millennial pegged the indicator at roughly 240%. Edition” (Cambridge Univ. Press) and BEA data. Years 2021-2024 are estimates. Economic predictions are based on estimates and Put another way, investors were paying are subject to change. All indices are unmanaged. It is not possible to invest directly in an index. Past performance does not about $2.40 for every $1.00 of goods pro-guarantee future results. duced. That is roughly twice the long-term average, and the highest level in the past 70 years. Disclosure: Investor willingness to pay up for equities has led 10-year Past performance does not guarantee future results. annualized returns of the S&P 500 to hit levels not seen since Investing involves risk, including the potential loss of principal. the Dotcom era, as shown below. For those who remember There is no guarantee that a particular investment strategy will be successful. the lost decade that followed the bursting of the tech bubble, Value investments are subject to the risk that their intrinsic value may not be recog-recent excesses, in our opinion, are a cause for concern. nized by the broad market. As Investors have rushed into cyclical names and large The statements and opinions expressed in the articles or appearances are those of growth companies, opportunities have emerged to invest in the presenter. Any discussion of investments and investment strategies represents high-quality businesses at historically attractive valuations the presenters’ views as of the date created and are subject to change without that are less sensitive to various phases of the business cycle. notice. The opinions expressed are for general information only and are not intended We believe this prudent approach runs counter to bidding up to provide specific advice or recommendations for any individual. Any forecasts may businesses running on waning stimulus funds. not prove to be true. As we sort through the companies that hit our radar, we Economic predictions are based on estimates and are subject to change. continue to follow our time-tested process and try to avoid Heartland Advisors defines market cap ranges by the following indices: micro-cap investments that fit some vague macro-economic view. We by the Russell Microcap®, small-cap by the Russell 2000®, mid-cap by the Russell remain focused on valuations, balance sheet strength and Midcap®, large-cap by the Russell Top 2000®. catalysts that can result in a change in perception by investors. Heartland’s investing glossary provides definitions for several terms used in this We believe this disciplined application of our playbook will be article. key to navigating the quarters ahead. n Will Nasgovitz is CEO and Portfolio Manager of Heartland Advisors. Learn more at heartlandadvisors.com. WealthManagement.com • January 2022 • 65