Warren Buffett: America's businesses 'usually find a way' 💪
Plus a charted review of the macro crosscurrents 🔀
📈 The stock market climbed to all-time highs, with the S&P 500 setting an intraday high of 6,147.43 and a closing high of 6,144.15 on Tuesday. The index lost 2.1% last week to close at 6,013.13. It’s now up 2.2% year to date and up 68.1% from its October 12, 2022 closing low of 3,577.03. For more on market moves, read: Investing in the stock market is an unpleasant process 📉
-
Warren Buffett, legendary investor and CEO of Berkshire Hathaway, wants everyone to know that he remains a long-term bull on U.S. stocks.
“Despite what some commentators currently view as an extraordinary cash position at Berkshire, the great majority of your money remains in equities,” Buffett said this in his new annual letter to Berkshire Hathaway shareholders. “That preference won’t change.”
Buffett appears to be responding to the many news headlines emphasizing Berkshire’s growing cash position. Here are a few from the past few weeks:
Why Is Warren Buffett Hoarding So Much Cash? - WSJ
As investors await Warren Buffett’s annual letter, is Berkshire Hathaway hoarding cash out of fear — or waiting for an opportunity? - Fortune
Warren Buffett Is Out of Step With Markets. Berkshire Hathaway Keeps Selling Stocks. - Barron’s
Warren Buffett’s growing cash pile and 3 other things to watch for in Berkshire’s investor letter - MarketWatch
Berkshire’s cash pile grew to $334 billion in 2024, up from $167.6 billion the year prior.
Buffett acknowledges that the value of marketable equities — companies that continue to trade publicly in the stock market — held by Berkshire declined last year.
But he also takes a more holistic view of Berkshire’s portfolio, which includes 189 companies that Berkshire owns. These are companies that don’t trade on the stock market like GEICO, Precision Castparts, BNSF, Pilot Travel Centers, Clayton Homes, and Fruit of the Loom.
“While our ownership in marketable equities moved downward last year from $354 billion to $272 billion, the value of our non-quoted controlled equities increased somewhat and remains far greater than the value of the marketable portfolio,” he wrote.
Businesses ‘usually find a way’ 💪
Commentators can read into Berkshire’s quarterly and annual tweaks however they like.
But Buffett’s long-term optimism for American business hasn’t changed, which is why he’d rather be invested in stocks over bonds or cash.
“Berkshire shareholders can rest assured that we will forever deploy a substantial majority of their money in equities – mostly American equities although many of these will have international operations of significance,” Buffett wrote. “Berkshire will never prefer ownership of cash-equivalent assets over the ownership of good businesses, whether controlled or only partially owned.”
Buffett’s comments come as the U.S. debt and deficit — as well as the Trump administration’s effort to address it all — dominate headlines. Any development in this area has implications for the dollar, interest rates, and economic activity broadly.
“Paper money can see its value evaporate if fiscal folly prevails,” he added. “In some countries, this reckless practice has become habitual, and, in our country’s short history, the U.S. has come close to the edge. Fixed-coupon bonds provide no protection against runaway currency.“
Businesses are not totally immune to emerging challenges. But history has shown repeatedly that they are quick to adapt and evolve in their relentless pursuit of growth. (We discussed this in last week’s TKer.)
“Businesses, as well as individuals with desired talents, however, will usually find a way to cope with monetary instability as long as their goods or services are desired by the country’s citizenry,” Buffett said. “I have depended on the success of American businesses and I will continue to do so.”
The long game is undefeated 🔭
None of this is to suggest stocks will only go up from here.
Buffett would be the first to tell you he has “not been good at timing” the market.
In fact, one of his most bullish essays, a New York Times op-ed titled “Buy American. I Am,” came just before the S&P 500 fell another 26% before the market bottomed in March 2009.
But the thesis of his piece ultimately held, and those who bought U.S. equities at the time did extraordinarily well in the years to follow.
The American brand of capitalism Buffett promotes isn’t just about how companies are able to come up with great goods and services. Rather, it’s about how they are unmatched at overcoming what often appear to be insurmountable challenges.
While investors should always brace for short-term volatility, they should also stay focused on the long game, which remains undefeated.
-
More of Warren Buffett’s insights on TKer:
Review of the macro crosscurrents 🔀
There were several notable data points and macroeconomic developments since our last review:
🏚 Home sales fall. Sales of previously owned homes fell by 4.9% in January to an annualized rate of 4.08 million units. From NAR chief economist Lawrence Yun: “Mortgage rates have refused to budge for several months despite multiple rounds of short-term interest rate cuts by the Federal Reserve. When combined with elevated home prices, housing affordability remains a major challenge.”
💸 Home prices fall. Prices for previously owned homes declined from last month’s levels but were above year ago levels. From the NAR: “The median existing-home sales price for all housing types in January was $396,900, up 4.8% from one year ago ($378,600).”
🏠 Homebuilder sentiment tumbles. From the NAHB’s Carl Harris: “While builders hold out hope for pro-development policies, particularly for regulatory reform, policy uncertainty and cost factors created a reset for 2025 expectations in the most recent HMI. Uncertainty on the tariff front helped push builders’ expectations for future sales volume down to the lowest level since December 2023. Incentive use may also be weakening as a sales strategy as elevated interest rates reduce the pool of eligible home buyers.”
🔨 New home construction starts fall. Housing starts fell 9.8% in January to an annualized rate of 1.37 million units, according to the Census Bureau. Building permits ticked up 0.1% to an annualized rate of 1.48 million units.
🏠 Mortgage rates tick lower. According to Freddie Mac, the average 30-year fixed-rate mortgage declined to 6.85% from 6.87% last week. From Freddie Mac: “Mortgage rates decreased slightly this week. The 30-year fixed-rate mortgage has stayed just under 7% for five consecutive weeks and in that time has fluctuated less than 20 basis points. This stability continues to bode well for potential buyers and sellers as the spring homebuying season approaches.”
There are 147 million housing units in the U.S., of which 86.6 million are owner-occupied and 34 million (or 40%) of which are mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to movements in home prices or mortgage rates.
For more on mortgages and home prices, read: Why home prices and rents are creating all sorts of confusion about inflation 😖
💼 Unemployment claims rise. Initial claims for unemployment benefits increased to 219,000 during the week ending February 15, up from 213,000 the week prior. This metric continues to be at levels historically associated with economic growth.
For more on the labor market, read: The labor market is cooling 💼
💳 Card spending data is holding up. From JPMorgan: “As of 14 Feb 2025, our Chase Consumer Card spending data (unadjusted) was 3.3% above the same day last year. Based on the Chase Consumer Card data through 14 Feb 2025, our estimate of the US Census February control measure of retail sales m/m is 0.33%.”
From BofA: “Total card spending per HH was up 0.5% y/y in the week ending Feb 15, according to BAC aggregated credit & debit card data. Y/y total spending in the Midwest seems to have been impacted by snowstorms in the week ending Feb 15. Also, there was a negative impact from the Superbowl timing change (2/9/25 vs. 2/11/24), weighing on y/y total spending.“
For more on the consumer, read: Americans have money, and they're spending it 🛍️
⛽️ Gas prices idle. From AAA: “Most drivers saw few changes at the pump this past week, as the national average for a gallon of gas remained steady at $3.16... According to new data from the Energy Information Administration (EIA), gasoline demand decreased from 8.57 million b/d last week to 8.23. Total domestic gasoline supply dropped from 248.1 million barrels to 247.9. Gasoline production also decreased last week, averaging 9.2 million barrels per day.”
For more on energy prices, read: Higher oil prices meant something different in the past 🛢️
👎 Consumer vibes tumble. From the University of Michigan’s January Surveys of Consumers: “Consumer sentiment extended its early month decline, sliding nearly 10% from January. The decrease was unanimous across groups by age, income, and wealth. All five index components deteriorated this month, led by a 19% plunge in buying conditions for durables, in large part due to fears that tariff-induced price increases are imminent. Expectations for personal finances and the short-run economic outlook both declined almost 10% in February, while the long-run economic outlook fell back about 6% to its lowest reading since November 2023. While sentiment fell for both Democrats and Independents, it was unchanged for Republicans, reflecting continued disagreements on the consequences of new economic policies.”
For more on how politics affects sentiment, read: Beware how your politics distort how you perceive economic realities 😵💫
👍 CEOs are more optimistic. The Conference Board’s CEO Confidence index signaled improving optimism in Q1 2025. From The Conference Board’s Stephanie Guichard: “The improvement in CEO Confidence in the first quarter of 2025 was significant and broad-based. All components of the Measure improved, as CEOs were substantially more optimistic about current economic conditions as well as about future economic conditions — both overall and in their own industries. CEOs’ assessments of current conditions in their own industries also improved. (This measure is not included in calculating the topline Confidence measure). Consistent with an improved expected outlook, there was a notable increase in the share of CEOs expecting to increase investment plans and a decline in the share expecting to downsize investment plans. Still, a majority of CEOs indicated no revisions to their capital spending plans over the next 12 months.“
For more on the state of sentiment, read: The post-election sentiment sea change 🔃 and Beware how your politics distort how you perceive economic realities 😵💫
😬 This is the stuff pros are worried about. According to BofA’s February Global Fund Manager Survey: “39% of February FMS investors say a recessionary trade war is the biggest 'tail risk', overtaking inflation causing Fed to hike (31%), and followed by AI bubble (13%).”
For more on risks, read: Three observations about uncertainty in the markets 😟 and Two times when uncertainty seemed low and confidence was high 🌈
🏢 Offices remain relatively empty. From Kastle Systems: “Peak day office occupancy was 61.2% on Tuesday last week, down 2.1 points from the previous week. Winter weather affected workers in Washington, D.C., Chicago, and Philadelphia, as Wednesday occupancy fell 36.1 points, 22.3 points, and 13.9 points, respectively. San Jose reached 64.5% occupancy on Tuesday, hitting a new record single-day post-pandemic high. The average low was on Friday at 36.4%, up six tenths of a point from last week.”
For more on office occupancy, read: This stat about offices reminds us things are far from normal 🏢
🇺🇸 Surveys point to cooling activity. From S&P Global’s February Flash U.S. PMI: “The upbeat mood seen among US businesses at the start of the year has evaporated, replaced with a darkening picture of heightened uncertainty, stalling business activity and rising prices. Optimism about the year ahead has slumped from the near-three-year highs seen at the turn of the year to one of the gloomiest since the pandemic. Companies report widespread concerns about the impact of federal government policies, ranging from spending cuts to tariffs and geopolitical developments. Sales are reportedly being hit by the uncertainty caused by the changing political landscape, and prices are rising amid tariff-related price hikes from suppliers.”
Keep in mind that during times of perceived stress, soft survey data tends to be more exaggerated than actual hard data.
For more on this, read: What businesses do > what businesses say 🙊
📈 Near-term GDP growth estimates remain positive. The Atlanta Fed’s GDPNow model sees real GDP growth climbing at a 2.3% rate in Q1.
For more on the economy, read: 9 once-hot economic charts that cooled 📉
Putting it all together 🤔
The long-term outlook for the stock market remains favorable, bolstered by expectations for years of earnings growth. And earnings are the most important driver of stock prices.
Demand for goods and services is positive, and the economy continues to grow. At the same time, economic growth has normalized from much hotter levels earlier in the cycle. The economy is less “coiled” these days as major tailwinds like excess job openings have faded.
To be clear: The economy remains very healthy, supported by strong consumer and business balance sheets. Job creation remains positive. And the Federal Reserve — having resolved the inflation crisis — has shifted its focus toward supporting the labor market.
We are in an odd period given that the hard economic data has decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continue to grow and trend at record levels. From an investor’s perspective, what matters is that the hard economic data continues to hold up.
Analysts expect the U.S. stock market could outperform the U.S. economy, thanks largely due to positive operating leverage. Since the pandemic, companies have adjusted their cost structures aggressively. This has come with strategic layoffs and investment in new equipment, including hardware powered by AI. These moves are resulting in positive operating leverage, which means a modest amount of sales growth — in the cooling economy — is translating to robust earnings growth.
Of course, this does not mean we should get complacent. There will always be risks to worry about — such as U.S. political uncertainty, geopolitical turmoil, energy price volatility, cyber attacks, etc. There are also the dreaded unknowns. Any of these risks can flare up and spark short-term volatility in the markets.
There’s also the harsh reality that economic recessions and bear markets are developments that all long-term investors should expect to experience as they build wealth in the markets. Always keep your stock market seat belts fastened.
For now, there’s no reason to believe there’ll be a challenge that the economy and the markets won’t be able to overcome over time. The long game remains undefeated, and it’s a streak long-term investors can expect to continue.
For more on how the macro story is evolving, check out the previous review of the macro crosscurrents »
Key insights about the stock market 📈
Here’s a roundup of some of TKer’s most talked-about paid and free newsletters about the stock market. All of the headlines are hyperlinked to the archived pieces.
10 truths about the stock market 📈
The stock market can be an intimidating place: It’s real money on the line, there’s an overwhelming amount of information, and people have lost fortunes in it very quickly. But it’s also a place where thoughtful investors have long accumulated a lot of wealth. The primary difference between those two outlooks is related to misconceptions about the stock market that can lead people to make poor investment decisions.
The makeup of the S&P 500 is constantly changing 🔀
Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500 — an index of 500 of the largest U.S. companies — is anything but a static set of 500 stocks.
The key driver of stock prices: Earnings💰
For investors, anything you can ever learn about a company matters only if it also tells you something about earnings. That’s because long-term moves in a stock can ultimately be explained by the underlying company’s earnings, expectations for earnings, and uncertainty about those expectations for earnings. Over time, the relationship between stock prices and earnings have a very tight statistical relationship.
Stomach-churning stock market sell-offs are normal🎢
Investors should always be mentally prepared for some big sell-offs in the stock market. It’s part of the deal when you invest in an asset class that is sensitive to the constant flow of good and bad news. Since 1950, the S&P 500 has seen an average annual max drawdown (i.e., the biggest intra-year sell-off) of 14%.
High and rising interest rates don't spell doom for stocks👍
Generally speaking, rising interest rates are not welcome news for the economy and the stock market. They represent higher financing costs for businesses and consumers. All other things being equal, rising rates represent a hindrance to growth. However, the world is complicated, and this narrative comes with a lot of nuance. One big counterintuitive piece to this narrative is that historically, stocks have actually performed well during periods of rising interest rates.
How the stock market performed around recessions 📉📈
Every recession in history was different. And the range of stock performance around them varied greatly. There are two things worth noting. First, recessions have always been accompanied by a significant drawdown in stock prices. Second, the stock market bottomed and inflected upward long before recessions ended.
In the stock market, time pays ⏳
Since 1928, the S&P 500 generated a positive total return more than 89% of the time over all five-year periods. Those are pretty good odds. When you extend the timeframe to 20 years, you’ll see that there’s never been a period where the S&P 500 didn’t generate a positive return.
What a strong dollar means for stocks 👑
While a strong dollar may be great news for Americans vacationing abroad and U.S. businesses importing goods from overseas, it’s a headwind for multinational U.S.-based corporations doing business in non-U.S. markets.
Economy ≠ Stock Market 🤷♂️
The stock market sorta reflects the economy. But also, not really. The S&P 500 is more about the manufacture and sale of goods. U.S. GDP is more about providing services.
Stanley Druckenmiller's No. 1 piece of advice for novice investors 🧐
…you don't want to buy them when earnings are great, because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there's overcapacity and they're losing money. What about when they're losing money? Well, then they’ve stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. So, you always have to sort of imagine the world the way it's going to be in 18 to 24 months as opposed to now. If you buy it now, you're buying into every single fad every single moment. Whereas if you envision the future, you're trying to imagine how that might be reflected differently in security prices.
Peter Lynch made a remarkably prescient market observation in 1994 🎯
Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years… The next 500 points, the next 600 points — I don’t know which way they’ll go… They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That's all there is to it.
Warren Buffett's 'fourth law of motion' 📉
Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.
Most pros can’t beat the market 🥊
According to S&P Dow Jones Indices (SPDJI), 59.7% of U.S. large-cap equity fund managers underperformed the S&P 500 in 2023. As you stretch the time horizon, the numbers get even more dismal. Over a three-year period, 79.8% underperformed. Over a 10-year period, 87.4% underperformed. And over a 20-year period, 93% underperformed. This 2023 performance follows 13 consecutive years in which the majority of fund managers in this category have lagged the index.
Proof that 'past performance is no guarantee of future results' 📊
S&P Dow Jones Indices found that funds beat their benchmark in a given year are rarely able to continue outperforming in subsequent years. For example, 334 large-cap equity funds were in the top half of performance in 2021. Of those funds, 58.7% came in the top half again in 2022. But just 6.9% were able to extend that streak through 2023. If you set the bar even higher and consider those in the top quartile of performance, just 20.1% of 164 large-cap funds remained in the top quartile in 2022. No large-cap funds were able to stay in the top quartile for the three consecutive years ending in 2023.
The odds are stacked against stock pickers 🎲
Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. In fact, most professional stock pickers aren’t able to do this on a consistent basis. One of the reasons for this is that most stocks don’t deliver above-average returns. According to S&P Dow Jones Indices, only 24% of the stocks in the S&P 500 outperformed the average stock’s return from 2000 to 2022. Over this period, the average return on an S&P 500 stock was 390%, while the median stock rose by just 93%.
