“The most important item over time in valuation is obviously interest rates,” Warren Buffett explained in 2017. Never mind that this appears to contradict his beliefs back in 2001.
Sixteen years earlier, Mr. Buffett stated that stock market-capitalization-to-GDP was “the best single measure of where valuations stand at any given moment.” On this indicator, then, stocks have rarely been as over-priced as they are right now.
It is certainly possible that the financial crisis of 2008 fundamentally altered the investment game. In particular, Mr. Buffett may be changing with the times, recognizing that central bank manipulation of borrowing costs is the primary determinant for stock price appreciation (or depreciation).
For the moment, then, let’s assume that ultra-low interest rate policy is the main reason for the stock market’s lengthy uptrend. Whether the stock uptrend has prospered because consumers could buy more cars and more homes with those lower rates, or whether the stock uptrend has its roots in corporations borrowing money to buy back shares of their own stock, or whether the stock uptrend has persisted because the federal government has been using negative real rates to spend trillions and trillions with reckless abandon, the premise remains the same; that is, easy-to-access, low-cost credit now goes hand-in-hand with higher stock prices.
If the premise is accurate, it would seem that certain sectors of the economy would be more critical for bull market continuation. For example, “too-low-for-too-long” Federal Reserve rate policy began taking its toll on financial institutions in late 2006 and 2007, well before the 2008 broad market collapse.
It follows that investors may want to question the durability of the current stock market bull. Can it really succeed “ex-financials?”
In the chart above, the SPDR Sector Select Financials () is below