Warren Buffett, one of the world’s most successful investors, appears to be battening down the hatches for a stock market crash.
The Oracle of Omaha’s Berkshire Hathaway (NYSE: BRK) had cashed out nearly 60% of its investment portfolio at the end of June according to an SEC filing. The $122 billion cash pile is unusual for Buffett, who typically puts his money to work through acquisitions, stock buybacks or equity purchases.
Stock Market Crash
Berkshire Hathaway’s massive cash coffer has many wondering if a stock market crash is on the way. Buffett’s isn’t called “the Oracle of Omaha” for nothing; he successfully prepared for the last market crash back in 2008 by storing up excess cash which he later lent out to struggling firms like Goldman Sachs (NYSE:GS) and General Electric (NYSE:GE).
Buffett’s famed patience and eye for a bargain is likely at play here; he often measures the health of the market by looking at its capitalization compared to GDP. Just before the dot-com bubble burst the so-called “Buffett indicator” came in at 146% and in 2007 before the financial crisis hit the figure was 135%. Right now that ratio sits just above 140%.
At 88 years old, Buffett is an investing legend— but is he still on top of his game? Berkshire Hathaway’s returns have trailed the Dow, Nasdaq and S&P 500 over the past five years, a fact that has led some to question Buffett’s judgement.
But that doesn’t mean a downturn isn’t in the cards, as there are other factors aside from the Buffett Indicator that suggest as selloff is on the horizon.
For one thing, there’s the Federal Reserve’s interest rate cuts. The U.S. central bank has cut interest rates at its last two meetings and many are expecting to see further easing at its upcoming meeting. Although the bank has said it doesn’t plan to cut rates over the next three months, the market could still react poorly to its Oct. 30 meeting if further rate cuts aren’t announced.
Plus, there’s the impact of the U.S. trade war with both China and Europe. Rhetoric from both Europe and China has caused a great deal of turbulence for markets, but a lack of progress toward a resolution on either front could hurt the U.S. economy significantly enough to trigger a prolonged stock market slide.
The S&P 500 currently boasts a P/E ratio of 21.3 while the Nasdaq’s P/E is a whopping 30.33 – valuations that are plausible when economic expansion is driving growth. However, an economic slowdown could hurt performance, cause disappointing downside surprise and ultimately push the stock market into a nosedive.