There’s blood on the streets but Warren Buffett is sitting it out. | Source: REUTERS/Rick Wilking
- After a blistering selloff in March, the stock market has bounced back 30% despite the worst economic backdrop since the Great Depression.
- Value investors like Warren Buffett are stuck on the sidelines as stock prices remain stubbornly high compared to fundamentals.
- Hedge fund manager Dan McMurtrie says this type of market action is ‘hell’ for value investors.
Warren Buffett should be on a buying spree right now.
He’s famous for the saying “buy when there’s blood in the streets.”
Well, it doesn’t get much bloodier than 30 million unemployed in six weeks. And it doesn’t get much worse than a 30% crash in stocks in one month.
So why isn’t Buffett buying?
As a value investor, Buffett likes to sweep in and buy up companies at a discount price while everyone else panics.
This time is different.
As the stock market rebounds at a rapid pace, Buffett is paralyzed, sitting on the sidelines with $137 billion in cash.
As hedge fund manager Dan McMurtrie put it:
Honestly, [this is] hell for value guys.
Federal Reserve beat Buffett to the punch
In a typical recession, Warren Buffett is the man you call when your company needs help.
For example, he swooped in to help the banks during the 2008 financial crisis, making sure he got a premium on the stock.
This time, when the phones started ringing, the Federal Reserve beat Buffett to the punch. The Oracle of Omaha explains:
There was a period right before the Fed acted, we were starting to get calls. They weren’t attractive calls, but we were getting calls.
And then the Federal Reserve pumped trillions into the credit market to support the economy. Those calls to Buffett disappeared.
After the Fed acted, a number of them were able to get money in the public market frankly at terms we wouldn’t have given.
You can see this central bank money literally propping up the markets in the tweet below from Fidelity’s Jurrien Timmer. As the global money supply balloons, it’s dragging the equities market back up.
Buffett wasn’t able to swoop in and pick up those value stocks this time.
The Fed ‘halted a recession’
By acting so fast and so aggressively, the Federal Reserve have “KOed a recession,” according to McMurtrie. In a Medium post, he explains:
The Fed has made it clear a liquidity crisis will not be allowed.
Their actions have put a backstop on the financial markets, and helped push stocks back up 30%. The Nasdaq is now positive on the year!
By any fundamental or value-based analysis, it’s still wildly overvalued.
The stock market is still over-valued
In fact, the S&P 500 is trading at 19x its forward price-to-earnings ratio. That’s the highest in 20 years, despite the March selloff.
It’s no wonder Buffett is paralyzed. By his measures, as a value investor, there is nothing worth buying right now.
Despite the worst economic crisis in modern history, stocks are still at record values.
This is, indeed, hell for value guys like Buffett.
Just look at Buffett’s favourite value indicator. Stocks are every bit as over-valued as the dot-com bubble.
Warren Buffett’s favourite stock market indicator, which tracks equities against GDP, is wildly overvalued. Source: Advisor Perspectives
There might not be another stock market downturn
Buffett isn’t alone. A recent survey of high-net worth investors revealed that most are sitting on the sidelines waiting to buy at a better price.
But what about disastrous unemployment and economic data, you ask?
Well, the fiscal bazooka from the White House has been every bit as powerful as the monetary response. Many newly unemployed are collecting more now than when the were employed. Total consumer spending is now higher than pre-coronavirus. McMurtie explains:
Fiscal stimulus has made consumers more than whole, with aggregate consumer purchasing power now UP versus pre COVID.
The Federal Reserve and the White House are propping this whole thing up. And Buffett could be waiting a long time for stocks to come back to ‘value.’
If Fed or Congress flinch, the market is going to get obliterated. That’s really the only thing that matters right now, hence hell as a fundamental guy. But is gov really going to under shoot this? No.
Until the Federal Reserve and Congress back down, this market is going to be hell for Warren Buffett. And anyone else waiting for another significant correction.
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.
This article was edited by Samburaj Das.