The S&P 500 and DAX indices have already recovered a good part of their losses after the first market slump in February and March this year (2020). For many people, the question now is: is the crash over and will we see new highs soon?
Who could answer this question better than master investor Warren Buffett himself? He has been investing very successfully for almost 80 years and has behaved correctly before many crashes. The last general meeting of Berkshire Hathaway (WKN: A0YJQ2) gave some clues as to what might be waiting for us.
Buffett’s actions in the past few months
So what is Warren Buffett doing now? He sold all of his airline shares and bought almost no new shares, although the market fell almost 34% in March 2020. In addition, his answer to the question of why he is not making a big purchase made one sit up and take notice: “I don’t see big opportunities,” it said.
In addition, his holding company’s cash on hand increased further to over $ 137 billion. So will we not see a V-shaped recovery, but a further market slump? This is possible. Large companies are supported in this way, but many medium-sized and small companies are going bankrupt in the meantime.
The American economy in crisis
In addition, the unemployment rate in the United States exploded to 14.7% in April 2020. In March 2020 it was still 4.4%. It is now higher than in the last crisis in 2009. Experience has shown that the unemployment rate falls only slowly after a crisis. This means that consumption will remain weak for a long time.
Small and medium-sized businesses and the working population form the backbone of every economy, not large corporations. However, you won’t recover anytime soon. Once many companies have disappeared, it will take time to replace them with others.
The US market is rated according to Buffett’s indicator
There is also another warning signal that Warren Buffett likes to use to assess the markets. It is the comparison of the market capitalization of all stocks with economic performance. In 2001, he described it as “probably the best single indicator of where the ratings are at a given point in time.” So where do we currently stand? The answer is not exactly encouraging – at 156.3% (05/13/2020).
This means that the market capitalization of the shares is still 56.3 percentage points above a fair valuation. Also calculates JP Morgan Chase (WKN: 850628) this year with a slump in American economic output by up to 25%.
In other words, the market would have to correct at least 36% to become attractive again for Buffett. This was last seen in 2008/09 when he was shopping more. Since around 2014, however, we have been using the Buffett indicator at values of 120% and more. So to justify the current stock valuation level, the economy would have to recover very quickly at the end of 2021 and even then the market would still be overvalued.
Conclusion
A new correction is therefore very likely. However, we can never infer our own portfolio from these market indicators. If we keep solid stocks with a not too high valuation and good stable dividends, we should not be influenced by it. However, the rally could be a good selling opportunity for higher-valued stocks.
The post Is the crash over already? This is what Warren Buffett’s actions point to! appeared first on The Motley Fool Germany.
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Christof Welzel does not own any of the shares mentioned. The Motley Fool owns and recommends shares of Berkshire Hathaway (B shares) and recommends the following options: Long January 2021 $ 200 call on Berkshire Hathaway (B shares), Short January 2021 $ 200 put on Berkshire Hathaway (B shares) and Short June 2020 $ 205 call on Berkshire Hathaway ( B shares).
Motley Fool Germany 2020
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