Warren Buffett Says America's 'Incredible Period' Is Ending
Zerbor
At Berkshire Hathaway's annual general meeting on Saturday, Mr. Buffett had ominous words to share. He said that during the past 6 months, the "incredible period" for the U.S. economy has been coming to an end. In addition, Buffett said that they expect most of Berkshire's business segments to report lower earnings this year compared to last. These are quite uncharacteristic comments from the Oracle of Omaha. We believe they have merit.
To start, S&P 500 earnings have been in decline over the past year. Annualized monthly earnings of the index for 2022 are in the table below. The trend through the beginning of 2023 was downward and accelerating. In addition, small cap earnings are declining faster than large cap, and small cap tends to lead.
2022-12-31 175.68 2022-11-30 179.99 2022-10-31 184.64 2022-09-30 190.25 2022-08-31 192.42 2022-07-31 194.11 2022-06-30 195.84 2022-05-31 200.48 2022-04-30 204.66 2022-03-31 207.78 2022-02-28 210.54 2022-01-31 212.44 2021-12-31 214.22 Click to enlarge
Quarterly S&P 500 earnings per share peaked at 53.94. Earnings climbed quickly out of the 2020 recession. They have since fallen back in line with the pre-2020 trend.
Data by YCharts
The primary contributor to the surge in earnings was the monetary and fiscal response to the pandemic by governments across the globe. The U.S. distributed enormous amounts of transfer payments for social benefits including extra unemployment payments and over $800 billion through the Paycheck Protection Program. These payments grew personal disposable income greatly. Americans used much of this currency to buy stuff which contributed to company earnings.
Data by YCharts
We are now in the process of unwinding the monetary impact of these programs. The Federal Reserve is tightening monetary policy to control the inflation that resulted from the stimulus. First, we can notice that M2 money stock growth has turned the most negative in 100 years at -4.05%. Changes in M2 tend to influence future changes in GDP. It suggests that additional weakness in GDP is to be expected.
Data by YCharts
Talk of recession is infectious. Economic data suggests that recession is likely but that the start date is up for debate. We have the view that a recession will begin in the U.S. by the end of the year. Many recession indicators continue to signal nothing while others have started to warn. The Estrella Mishkin recession probability index, as shown in purple below, is the highest since 1990.
Data by YCharts
Employment appears to remain strong and is often used to support the view that recession is avoidable. However, the trends of employment are shifting. Employee quits have been trending down over the past year while layoffs have trended up. This combination of change is most often observed during the early phases of a recession.
Data by YCharts
S&P 500 companies are reporting elevated levels of weak consumer demand. The average mention of weak demand has exceeded 0.6 per company which is the highest since 2020 during the beginning of the pandemic and 2008-09 during the great recession. Buffett's latest comments are like the cherry on top.
The Daily Shot (used with permission)
Berkshire Hathaway holds $130 billion in cash. That is over 18% of the company's market cap. Clearly, management is not confident in the near term outlook of U.S. equity markets. We have also been heavily allocated to cash and equivalents over the past 12 months. This is due to the increasing preponderance of data that supports lower growth and lower earnings. The U.S. has certainly experienced an incredible period of growth and profits over the last 3 years. That phase is coming to an end. Soon a new period of prosperity will begin. Just not right now.
What do you think? Are Buffett's comments realistic? Leave a comment below.
Source: Seeking Alpha
