One of the may indicators for increasing stock valuations beyond their norm is the so-called “Buffett Indicator.” The measure and namesake is derived from none-other than the Omaha Oracle, Warren Buffett. Mr. Buffett has a long history of value investing through his firm Berkshire Hathaway.
In order to evaluate discounts or deals within the market, a generalized measure was created to evaluate how ‘expensive’ the current marketplace is relative to the total aggregate production measure by U.S. Gross Domestic Product (GDP).
options(stringsAsFactors = F)
setwd(paste0(Sys.getenv("HOME"), "/R/2018/Buffet-Indicator"))
pks <- c("reshape2", "tidyverse", "tidyquant",
"lubridate", "ggplot2", "scales", "viridis")
invisible(lapply(pks, require, character.only = T))
tickers <- c("WILL5000PRFC", "GDP", "NCBEILQ027S")
d_recessions <- read.table(textConnection(
"Peak, Trough
1857-06-01, 1858-12-01
1860-10-01, 1861-06-01
1865-04-01, 1867-12-01
1869-06-01, 1870-12-01
1873-10-01, 1879-03-01
1882-03-01, 1885-05-01
1887-03-01, 1888-04-01
1890-07-01, 1891-05-01
1893-01-01, 1894-06-01
1895-12-01, 1897-06-01
1899-06-01, 1900-12-01
1902-09-01, 1904-08-01
1907-05-01, 1908-06-01
1910-01-01, 1912-01-01
1913-01-01, 1914-12-01
1918-08-01, 1919-03-01
1920-01-01, 1921-07-01
1923-05-01, 1924-07-01
1926-10-01, 1927-11-01
1929-08-01, 1933-03-01
1937-05-01, 1938-06-01
1945-02-01, 1945-10-01
1948-11-01, 1949-10-01
1953-07-01, 1954-05-01
1957-08-01, 1958-04-01
1960-04-01, 1961-02-01
1969-12-01, 1970-11-01
1973-11-01, 1975-03-01
1980-01-01, 1980-07-01
1981-07-01, 1982-11-01
1990-07-01, 1991-03-01
2001-03-01, 2001-11-01
2007-12-01, 2009-06-01"), sep=',',
colClasses=c('Date', 'Date'), header=TRUE)d_stock <- tq_get(x = tickers[1], get = "economic.data", from="1971-01-01")%>%
na.omit()%>%
mutate(report_freq = ifelse(date < 1979-12-01, "monthly", "daily"),
qtr_dt = as.yearqtr(date, "%Y-%m-%d"))%>%
group_by(qtr_dt)%>%
summarise(qtr_value_willshire = mean(price))%>%
ungroup()
d_gdp <- tq_get(x = tickers[2], get = "economic.data", from="1971-01-01")%>%
mutate(qtr_dt = as.yearqtr(date, "%Y-%m-%d"))%>%
group_by(qtr_dt)%>%
summarise(qtr_value_gdp = mean(price))%>%
ungroup()
d_fed_assets <- tq_get(x = tickers[3], get="economic.data", from="1971-01-01")%>%
mutate(qtr_dt = as.yearqtr(date, "%Y-%m-%d"))%>%
group_by(qtr_dt)%>%
summarise(qtr_value_z1 = mean(price)/10^3)%>%
ungroup()
d_full <- d_gdp%>%
inner_join(., d_stock, by=c("qtr_dt"="qtr_dt"))%>%
inner_join(., d_fed_assets, by = c("qtr_dt"="qtr_dt"))%>%
mutate(willshire_val_ratio = qtr_value_willshire/qtr_value_gdp,
z1_val_ratio = qtr_value_z1/qtr_value_gdp)
p1_recession <- subset(d_recessions, Peak >= min(d_full$qtr_dt))d_p1 <- d_full%>%
select(qtr_dt, contains("ratio"))%>%
melt(., id.vars = "qtr_dt")
p1 <- ggplot(d_p1)+
geom_line(aes(x = qtr_dt, y = value, color = variable), size = 1.25)+
scale_x_yearqtr()+
scale_y_continuous(labels=percent)+
scale_color_viridis_d(labels = c("Wilshire/GDP", "Non-Financial Corp Liabilities/GDP"))+
geom_line(aes(x = qtr_dt, y = mean(value)), linetype = 2, color = "red")+
geom_smooth(aes(x = qtr_dt, y = value), method = "auto", formula = y~x)+
geom_rect(data = p1_recession, aes(xmin = as.yearqtr(Peak),
xmax = as.yearqtr(Trough), ymin = -Inf, ymax = +Inf),
fill = 'dodgerblue1', alpha = 0.3)+
labs(title = "Buffet Indicator Ratio",
x = NULL,
y = "Ratio of the: Willshire 5000 / GDP",
caption = "NBER, Federal Reserve, St. Louis, Tables: WILL5000PRFC, GDP, NCBEILQ027S")+
theme_minimal()+
theme(legend.position = "top",
legend.title = element_blank())
p1