Warren Buffett turns bearish on stocks despite US stocks posting their best monthly gains since 1987.
Has Warren Buffett, the world’s most successful contrarian value investor gone against his investing mantra, “Be fearful when others are greedy. Be greedy when others are fearful”.
The 2020 great stock market crash, triggered by the coronabubble burst saw the major indices fall 30% from their record high in February and sent the market sentiment indicator VIX spirally above 80, a key indicator of stock investors nearing peak fear.
“Warren Buffett turns bearish on stocks despite US stocks posting their best monthly gains since 1987”
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Typically the octogenarian billionaire investor is a stock bargain hunter in a selloff, but in late February’s stock rout Warren Buffett turns bearish
Even April’s stock hefty gains where US stocks close out their best month since 1987 were not enough to entice Warren Buffett’s Berkshire Hathaway cash mountain of $137 billion off the sideline.
Warren Buffett was forecasting a stock crash back in October, so it comes as no surprise that Buffett’s Berkshire Hathaway has been stockpiling cash to buy value stocks at a bargain
Warren Buffett turns bearish adds weight to the view that stocks have entered a new secular bear market where the new lows of March could be retested and perhaps even breached
Perhaps we could see new stock lows in the not too distant future. The bears are always bearish but when the optimists, the likes of Warren Buffett turn bearish than that is often interpreted that a fundamental change is in play.
“Even April’s stock hefty gains where US stocks close out their best month since 1987 were not enough to entice Warren Buffett’s Berkshire Hathaway cash mountain of $137 billion off the sideline”
THE WEALTH TRAINING COMPANY
If we are looking for a fundamental reason why Warren Buffett turns bearish on stocks, that the oracle didn’t spend a dime of his fund’s $137 billion cash pile on stocks perhaps it is because stocks are still too expensive
Warren Buffet’s favorite broad market indicator shows US stocks being never so expensive. Warren Buffet’s method is to take the ratio of the total market capitalization of all US stocks to US gross domestic product (GDP) to determine fair value for stocks. So with US Q1 GDP being drastically revised lower to -8% and with some market watchers expecting US Q2 to be revised to drop as much as 40%, it is not difficult to see that these valuations are way too high. Moreover, throw into the equation central bank buying and the price valuation distortions are magnified.
Air passenger totals in the US are down about 95 percent from a year ago, according to the latest statistics. Airline stock has been hit particularly hard with the index of major US carriers losing more than half its value this year, paced by a 70 percent drop for United Airlines Holdings.
Warren Buffett admitted that he lost money on his investments in the industry, which included stakes in American Airlines Group, Delta Air Lines, and Southwest Airlines.”The airline business – and I may be wrong and I hope I’m wrong – but I think it’s changed in a very major way,” said Warren Buffett.
“The future is much less clear to me” added Warren Buffett.
“We took money out of the business even at a substantial loss”
– Warren Buffett (on the airline business)
Warren Buffett turns bearish on airline stocks, particularly in the wake of a pandemic
“We made that decision in terms of the airline business. We took money out of the business even at a substantial loss” said Warren Buffett. “We will not fund a company … where we think that it is going to chew up money in the future” added Warren Buffett.
Berkshire Hathaway had held several large positions in the major US airlines, including an 11% stake in Delta Air Lines, 10% of American Airlines, 10% of Southwest Airlines, and 9% of United Airlines at the end of 2019, according to its annual report and company filings.
But now with thousands of planes grounded on airport tarmacs around the globe and no clear plan for the resumption of air travel, Warren Buffett said he had sold his stocks as the airline industry’s outlook rapidly changed.
Warren Buffett turns bearish on stocks as the legendary investor indicates that financial markets could still have further to fall as worldwide pandemic infectious rate exceeds 3.5 million with more than a quarter-million people reportedly dead worldwide
Warren Buffett said the outbreak could have an “extraordinarily wide” range of possible outcomes.
“We have taken swift action to increase our liquidity, dramatically reducing our spending in 2020, and strengthen our resilience in these exceptionally challenging times” – Rolls-Royce spokesman
Warren Buffett turns bearish on stocks because he believes that stock markets had not reached the bottom of the current dip
Speaking at the virtual annual meeting of his company Berkshire Hathaway from Omaha, Nebraska, Warren Buffett said he had not provided financial support to companies as he did buying Goldman Sachs shares during the 2008 financial crisis because he saw nothing “attractive” enough, even after the recent plunge in the markets.
An uncertain future is why Warren Buffett turns bearish on stocks
But that uncertainty has spread from airline stocks and their components, with aerospace being sent into a tailspin.
“We’re going to have aircraft in this country, we’re going to be flying. But the real question is whether you need a lot of new planes or not and when you’re likely to need them and it affects a lot of people” said Warren Buffett. “And it certainly affects Precision Castparts, it affects General Electric. It affects Boeing” he added.
Boeing and Airbus have also tumbled by more than half, with steeper declines at suppliers such as Spirit AeroSystems Holdings and Triumph Group.
Boeing also briefly paused the production of multiple aircraft programs. The company has said it will reduce employment by 10 percent, or about 16,000 jobs, and lower production of jetliners including the 787 Dreamliner.
British aircraft engine manufacturer Rolls-Royce could also see thousands of job cuts. “We have taken swift action to increase our liquidity, dramatically reducing our spending in 2020, and strengthen our resilience in these exceptionally challenging times” said Rolls-Royce’s spokesman.
So Warren Buffett turns bearish on stocks as the deflationary spiral freezes business investments as we enter what could now be the Greatest Depression and new lows in stock prices.