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August 23, 2020

Buffett Did What? Stocks are Overvalued, Says the Oracle of Omaha

Frank Cabibi

Warren Buffett, one of the most successful and richest investors of all time, long-time owner of the established conglomerate, Berkshire Hathaway, and mega bull has recently turned bearish on the US stock market. Granted, he has been saying this since the April rebound, but he finally put his money into action.

Although Buffett would probably never short the market, he decided to get rid of his bank stocks by dumping JP Morgan, Wells Fargo, Goldman Sachs and other banks with smaller positions. He sold over 250 million shares, hundreds of billions of dollars worth in total, but that's not all.

https://www.cnbc.com/berkshire-hathaway-portfolio/

The oracle of Omaha had also replaced his stake in bank stocks for a gold mining company, Barrick Gold Corp (NYSE: GOLD).
But why sell bank stocks when the Fed has funded them with trillions of dollars and pushing the S&P passed all-time highs?

Surprisingly enough, bank stocks have largely under performed the market in this latest bull rally. This is due issues regarding credit and debt; Analysts expect banks to be close to $900 billion in losses by 2022, according to CCN.

https://www.advisorperspectives.com/dshort/updates/2020/08/04/market-cap-to-gdp-an-updated-look-at-the-buffett-valuation-indicator

Here's the indicator Buffett uses to measure the Wilshire Stock index valuation compared to overall GDP. The way it's measured on this site (which is the accurate way) is by taking the annual GDP from Q1 and using that as the denominator throughout the year. So, it is basically the index divided by Q1 GDP.

In most recent numbers, GuruFocus has us at 179%, which they consider 'significantly overvalued' for the market. They also predict a 2.9% decline in stock market returns this year.

https://www.gurufocus.com/stock-market-valuations.php

What Now?

It's hard to predict what is going to happen in the market with tons of factors at play. For example, two weeks ago, jobless claims dropped into the 900,000s range, and investors believed the economy was recovering. The market shot up. Last week, jobless claims (which have been driving the market either up or down) reported back over 1 million at 1.1 million. Despite bad news, the market shot up harder than the previous weeks.

The problem investors are running into is that Wall Street will tell you that the economy doesn't reflect the stock market. And when there's bad news about the economy, the market tends to go up. However, when there's good news about the economy, that news matters all of the sudden, and it causes a buying frenzy. As an investor who's got most of their money sitting on the sidelines since April, it's frustrating to try to get an idea of when is the best time to buy. Do we brush off the fact that the US is in a recession? Do we join the hype train and ride with the bulls?

The answer is painfully simple: Bull and bear markets all come to an end eventually before it resets. Look past the trees and view the whole forest. Is a vaccine going to fix the damage already caused by the pandemic? Most stocks on the S&P 500 are showing negative returns expect for a certain few. There is lasting damage to the economy, and if you were forward-looking, it would make sense to see the market reflect that in stocks. Some analysts are talking years of rebuilding before the economy 'normalizes' again.

Here is the US30 on the 4H chart showing long wicks on both the tops and bottoms of several candles. That is a big sign of uncertainty where investors can't decide on what to do. No one really knows what is about to happen in the next week, month or year, not even Buffett himself. It's about being rational and understanding what makes sense in the long run.

Put yourself in an unbiased position and ask, 'should the S&P really be at all time highs right now?' The obvious answer should be no, but again, the market does not always make sense.

What to Look Out For This Week

Watch for vaccine news: This week may see another frenzy of buyers as a successful breakthrough on treatments to the coronavirus will most likely become approved by medical officials.

Watch Big Tech: The stocks like Amazon, Apple, Google, etc have been the main drivers of the market. Analysts are finding long entries on all of these companies excluding Netflix.. Traders are likely to follow.

Watch Technicals: This is definitely a trader's market now. News does affect price, especially good news, but indices are respecting lines of support, resistance, breakouts, wedges, etc. On the 4H chart, the US30 broke above the wedge with a strong green candle. A break in highs could mean that the SPX500 might want to continue its run for now.


Disclaimer:

Please note that this email is my personal opinion only. I am not a licensed financial advisor, and any information shared or discussed is not to be construed as investment advice. Trading and investing involves a degree of risk, and is not suitable to all investors. Please consult with your financial advisor before making any sort of investment decisions.

Featured Pic: https://news.theceomagazine.com/wp-content/uploads/2020/02/warren-buffett.jpg

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