Berkshire Hathaway held its annual meeting last weekend, and Warren Buffett provided some gloomy commentary on the U.S. economy. He said an "incredible period" in American history had recently ended, referencing the spending boom created by pandemic-era stimulus programs and historically low interest rates, and he mentioned that many businesses would likely report lower earnings this year as compared to last year.
The gravity of those words was compounded by the fact that Berkshire was a net seller of stocks during the first quarter. The company bought $2.9 billion in equity securities, but it sold $13.3 billion in equity securities during the same period. Those signals are undeniably pessimistic, but investors should be careful not to conflate near-term caution for long-term bearishness.
Buffett has always been, and continues to be, a long-term bull where the U.S. stock market is concerned.
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Buffett is still bullish on America
Buffett's knack for finding great investments has made Berkshire one of the largest companies in the world, but he attributes his success to the "American Tailwind." Readers will not find that term in a dictionary, but Buffett is referring to the uplifting effect of the U.S. economy. The combination of capitalism and a free market system have fostered tremendous innovation, creating immense wealth in the process. In fact, 15 of the 20 largest businesses in the world are American businesses.
Buffett sees more good times on the horizon. He offered 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."
Investors should be heartened by those words. There may be challenging times ahead, but Buffett believes the U.S. economy will continue to create wealth over time. There are many ways to capitalize on that forecast, but Buffett has often recommended buying an S&P 500 index fund such as the Vanguard S&P 500 ETF (VOO 1.00%). An S&P 500 index fund measures the performance of 500 large U.S. businesses that span all 11 market sectors, which makes it a good barometer for the broader economy. In other words, buying shares of the Vanguard S&P 500 ETF is like buying a slice of America.
The next bull market is coming
In October 2008, Buffett published an op-ed article in The New York Times. Some readers may be too young to remember the Great Recession, and others may wish they could forget, but the U.S. economy was in dire straits at the time. Investment bank Lehman Brothers had filed for bankruptcy one month earlier. It was the fourth largest investment bank in the U.S., but it still buckled under the weight of the subprime mortgage crisis, and Wall Street was terrified that financial contagion would spread to other institutions.
As a result, the S&P 500 was down 40% when Buffett wrote his piece for The Times, but he still offered the following levelheaded insight: "I can't predict the short-term movements of the stock market. I haven't the faintest idea as to whether stocks will be higher or lower a month or a year from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up."
Buffett was ultimately correct. The S&P 500 entered bull market territory in March 2009, but the Great Recession did not end until June 2009. That same pattern has played out in almost every recession in the last 50 years. The stock market typically rebounds well before economic activity reaches a bottom because investors tend to make decisions based on their expectations about the future.
The same outcome is likely in the current situation. So, when Buffett says an incredible period in American history has ended and corporate earnings may decline in the near term, he is not telling investors to exit the stock market. Berkshire may have been a net seller of stocks in the first quarter, but the company still has $328 billion invested in the market.
The next bull market could begin at any time. The best way to prepare is to stay invested, and to keep investing as opportunities arise.
