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What Warren Buffett’s Stock Market Pessimism Means to You


May. 20 2020, Updated 7:34 a.m. ET

Many hedge fund managers have spoken about the current stock market outlook. In this article, we’ll discuss Warren Buffett’s opinion about the stock markets. Notably, the stock markets have rebounded sharply from their March lows.

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Stock markets rebounded sharply

The NASDAQ Composite (NYSEARCA:QQQ) and the S&P 500 (NYSEARCA:SPY) have gained more than 30% from the March 23 troughs. Not many fund managers think that the rally is justified.

Stanley Druckenmiller and David Tepper

Stanley Druckenmiller and David Tepper think that the stock markets are the most overvalued they have ever seen. Mark Cuban also thinks that the markets are overvalued due to uncertainty regarding consumer and corporate demand. Read Can the US Stock Market’s Economic Reality Disconnect Continue? to learn more.

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Warren Buffett’s stock market actions

Warren Buffett’s stock market actions speak louder than words. Berkshire Hathaway’s (NYSE:BRK.B) chairman has been on a selling spree. Despite sitting on a cash trove of $137 billion, he hasn’t made any major purchases during the first quarter. Stock prices witnessed a drastic fall in March in the aftermath of COVID-19.

On the other hand, Buffett sold his stakes in Phillips 66 (NYSE:PSX), Travelers Companies, Goldman Sachs (NYSE:GS), and JPMorgan Chase during the first quarter. On May 2, he revealed that the fund sold all its airline holdings.

Warren Buffett’s actions compared to 2008 GFC

Notably, Buffett was a buyer in the aftermath of the GFC (Great Financial Crisis) in 2008. He bought Goldman Sachs and General Electric in 2008 and earned impressive returns. Back then, he wrote, “Today my money and my mouth both say equities.” He also said that equities will outperform cash over the next decade. He deterred investors from sitting on huge piles of cash. Ironically, Buffett has been sitting on large piles of cash. Right now, is cash a better choice than initiating new positions in equities?

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Advice for investors

While it isn’t advisable for retail investors to copy large hedge fund managers, Buffett’s market pessimism might have a lesson or two for investors. He’s sitting on a huge war chest. He would have certainly invested if he found something cheap enough that fit into his value-investing approach. However, he expects more pain ahead, which could very well be true for retail investors.

Do stock markets look overvalued?

The stock markets have been rising despite negative economic data. Based on some measures, markets have started looking really expensive. Previously, we discussed how the stimulus provided by the Fed helps inflate the stock market valuations rather than helping the economy improve. Read Is the Fed Only Helping US Stock Markets Right Now? to learn more. At some point, fundamentals will catch up with the stocks, which would lead to a downside. Therefore, investors shouldn’t be driven by fear of missing out or momentum. Instead, they should stick with fundamentals.


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