Warning: This Warren Buffett Indicator Predicts a Market Crash

Is Warren Buffett waiting for another market crash in the second half of 2020?

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close-up photo of investor Warren Buffett

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One of Warren Buffett’s most famous quotes is “Be fearful when others are greedy and be greedy when others are fearful.” This quote means that investors need to buy quality stocks at every market correction. In the long term, equity markets continue to move higher and have the opportunity to create massive wealth.

You would think that the Oracle of Omaha would have bought several stocks in the recent market crash. However, Warren Buffett’s business partner Charlie Munger surprised investors by saying that Buffett did not buy stocks in the 2020 bear market.

Berkshire Hathaway’s cash balance in fact rose to $137 billion at the end of Q1, from $128 billion at the end of 2019. Does this mean Warren Buffett expects another market crash in the second half of 2020?

Investors can take a look at one of Warren Buffett’s favorite economic indicators, which is the market cap to GDP ratio. In case this ratio is over 100%, the stock market can be considered overvalued and vice versa. This ratio stood at 110% at the start of the financial crisis and fell to 56% when markets bottomed out.

As of June 10, this Warren Buffett indicator for Canada stood at 115%, and this ratio is much higher at 150% in the United States. The U.S. stocks have outpaced their Canadian peers in the last two decades and would have a higher ratio.

However, we can see that the recent rally might be unsustainable given the uncertainties in domestic and global economies.

Warren Buffett has exposure to Canadian stocks

Berkshire Hathaway holds 14.95 million shares of Suncor Energy (TSX:SU)(NYSE:SU) worth $295.5 million. Berkshire also has 8.4 million shares of Restaurants Brands International worth $486 million as of March 2020.

SU Chart

SU data by YCharts

Suncor stock is trading at $26.44, which is 40% below its 52-week high. In the last five years, the stock has fallen 27% and underperformed broader markets. However, Suncor stock has almost doubled since hitting a multi-year low of $14.02 in March 2020.

Suncor is an integrated energy company and has been impacted by falling oil prices due to oversupply and lower than expected demand amid the COVID-19. Oil prices have fallen from US$60 per barrel at the start of 2020 to below US$20 per barrel recently.

Oil might see an uptick in demand as air traffic picks up. People will also start heading outside for summer trips. Further, Russia has agreed to production cuts and address the oversupply issue, which should benefit oil and energy stocks.

Suncor stock has a forward yield of 3.5% despite a dividend cut of 55%. In Q1, the company reported a net loss of $3.5 billion compared to a net profit of $1.2 billion in the prior-year period.

In order to cut costs and maintain a healthy balance sheet, Suncor plans to reduce capital expenditure to $3.8 billion from its earlier forecast of $4.2 billion for 2020. Suncor expects to save $800 million due to lower dividend payouts and reduced capital expenditures.

The Foolish takeaway

If you’re bullish about oil prices, Suncor remains an attractive investment right now. It is a Canadian energy giant trading at a cheap valuation and can rebound in the second half of 2020 as oil demand surges higher and economies open up.

However, Warren Buffett did not add to his position in Suncor stock in Q1 despite the massive decline. The investment mogul dumped airline stocks recently and exited the sector for good.

Will he do the same with Suncor and peers if there is no sign of oil recovery?

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool recommends RESTAURANT BRANDS INTERNATIONAL INC and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short June 2020 $205 calls on Berkshire Hathaway (B shares). Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.

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