In March, the Federal Open Market Committee (FOMC) updated its economic outlook to account for the latest turmoil in the bank industry. For context, Fed policymakers have raised interest rates rapidly over the past year, but recent bank failures could further tighten lending conditions.
To that end, the FOMC now expects the economy to fall into a mild recession before the end of 2023, with a recovery in the subsequent two years.
Investors might find that news alarming. The S&P 500 tumbled into a bear market last year as economic uncertainty made Wall Street nervous, and a recession could drive stocks even lower. But panicking solves nothing. Investors should consider this advice from Warren Buffett and Peter Lynch.
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Warren Buffett: Invest in America
Warren Buffett took control of a New England textile company known as Berkshire Hathaway in 1965, and he quickly shifted its focus to insurance and other non-textile operations. That move was particularly brilliant. Not only was the textile industry in decline, but insurance also provided investable capital in the form of premium payments, and Buffett has used that capital to great effect over the years.
Today, Berkshire is one of the largest and most diversified conglomerates in the world, with a market capitalization of $700 billion. The company also has an equity investment portfolio worth $308 billion, more than half of which comes from unrealized capital gains. Not surprisingly, Berkshire has made shareholders very wealthy over the years: The stock produced an annual return of 19.8% between 1965 and 2022, double the return of the S&P 500.
Buffett attributes that success to what he calls the "American tailwind." The U.S. has long been a hotbed of innovation -- 8 of the 10 largest companies in the world are American companies -- and that has translated into extraordinary economic growth throughout history.
With that in mind, Buffett provided the following insight in his latest letter to Berkshire shareholders: "I have yet to see a time when it made sense to make a long-term bet against America. And I doubt very much that any reader of this letter will have a different experience in the future."
Buffett is telling investors that, while storm clouds could be gathering on the economic horizon, the U.S. and its many wonderful businesses will ultimately be fine. Investors can act on that advice by purchasing an S&P 500 index fund, such as the Vanguard S&P 500 ETF.
Buffett has often recommended that strategy. Buying an S&P 500 index fund allows investors to diversify their capital across 500 of the largest American businesses.
Peter Lynch: Corrections are buying opportunities
Peter Lynch managed the Magellan Fund at Fidelity between 1977 and 1990. He crushed the market during that time, earning an annual return of 29.2% despite weathering two bear markets and two recessions. But the events of the early 1980s -- a period characterized by soaring inflation -- are particular noteworthy.
The S&P 500 dropped into a bear market in 1980, and the economy slipped into a recession one year later. Lynch saw his portfolio decline so sharply that he received a letter from a client in 1982 questioning his strategy. The client complained that Lynch was losing money on more than half the stocks he owned. But Lynch was unfazed. He responded:
These companies are going to do well once the economy comes back. We've got out of every other recession. I don't see why we won't come out of this one.
Investors can learn something from that. Bear markets and recessions are inevitable, but they are also temporary. That means otherwise healthy stocks that decline in value will likely rebound when economic conditions improve and the next bull market begins. In that context, investors should view bear markets and recessions as buying opportunities, and they should avoid attempting to time the market.
I'll end with a thought from Peter Lynch: "A correction is a wonderful opportunity to buy your favorite companies at a bargain price."
