Wealthy business magnate Warren Buffett suggests an impending market adjustment, yet there exists a promising aspect.
Legendary investor Warren Buffett and his corporation, Berkshire Hathaway (BRK.A shedding -0.07%, BRK.B gaining 0.25%), haven't given investors compelling reasons to back the market's strength as of late. Berkshire has primarily acted as a seller of stocks, with no indications of purchasing individual stocks or even repurchasing its own shares. Additionally, it has accumulated a substantial pile of cash and short-term Treasury bills, valued at exceeding $320 billion.
Speculation may have arisen that the holding company was amassing this cash in anticipation of something significant. However, its added large-scale sell-offs of Apple (AAPL rising 0.31%) and Bank of America (BAC falling -0.63%) in the third quarter raises a more plausible conclusion. This development implies that Buffett predicts an impending market adjustment. While this might not be the type of news investors were hoping for, it does come with an advantageous aspect.
Buffett excels in market prediction
By definition, a market adjustment occurs when a significant index, like the S&P 500, experiences a decrease of 10% to 20% from its recent peak. Market corrections are typically followed by recoveries that see these indices soar to new market highs, albeit to the detriment of investors in the interim as they experience notable drops in their portfolios.
Billionaire investor David Einhorn, who administers Greenlight Capital, has highlighted that despite Buffett's reputation as a long-term investor, he has also exhibited proficiency in forecasting market corrections.
- Buffett shut down his first fund - the Buffett Partnership - in 1969 due to worries about accounting fraud at an increasing number of businesses in the market.
- Buffett ventured into stock purchases following the market's nadir after the oil crisis of 1973-1974. In 1974, he acquired a sizable 11% stake in the Washington Post.
- Buffett refrained from the Wall Street enthusiasm and opted for bonds just prior to a broad market decline and 1987's Black Monday in 1986.
- Buffett and Berkshire Hathaway avoided disaster during the Great Recession. Instead, they seized opportunities to invest billions of dollars in Bank of America and Goldman Sachs, ultimately generating impressive returns.
A major aspect of Buffett's success has been his aptitude to avoid oversizing his investments during stock market downturns. Presently, Buffett and Berkshire Hathaway appear to be hinting that the market is displaying signs of exuberance. This information does not signify an impending market collapse but indicates that a shift in sentiment might be on the horizon.
A potential upside: American Express
Possibly the silver lining in this situation is that Berkshire Hathaway preserved its substantial position in payments and credit card titan American Express (AXP rising 0.05%). No significant sales of American Express were reported in the third quarter, as divulged in the company's recent financial report. American Express surpassed Bank of America as Berkshire's second-largest equity holding earlier this year, comprising 14.5% of Berkshire's approximately $284 billion stock portfolio.
American Express's business relies heavily on consumer well-being, making it a cyclical stock. Cyclical stocks typically struggle during economic downturns.
Several years have passed since Berkshire Hathaway last disposed of a substantial quantity of American Express shares, doing so in 2012. American Express primarily caters to higher-income individuals, who are usually better equipped to weather recessions. Buffett might've been contemplating reducing this stock position if he anticipated a severe economic downturn.
Yet, the absence of American Express stock sales may imply that Buffett is less worried about the U.S. economy and more concerned about the U.S. stock market. Data currently suggests that the market is overvalued, yet the overall economy remains solid. This could dissuade the Federal Reserve from lowering benchmark interest rates as much as investors anticipate, resulting in a market decline as investors readjust their expectations to a scenario where interest rates remain high for a longer duration.
While Buffett's sales of Apple and Bank of America stock merit concern, they could signify Buffett's expectation of an impending market readjustment. Market adjustments can be beneficial when markets become excessively ebullient, and an adjustment accentuated by a robust economy might not persist for long. Long-term investors tend to persevere through market adjustments as long as they manage to suppress panic. Moreover, adjustments often create opportunities for investors who are focused on the future recoveries that have historically followed them.
Buffett's selling of Apple and Bank of America stocks might indicate his anticipation of a market readjustment, which could be beneficial in taming overvalued markets. Despite the potential market decline, Buffett's preservation of Berkshire Hathaway's substantial position in American Express can be seen as a positive sign, suggesting less concern about the U.S. economy and more about the U.S. stock market's current overvaluation.
Investors who remain focused on the future and can suppress panic during market adjustments often find opportunities for favorable returns in the subsequent market recoveries.
