The Oracle of Omaha, Warren Buffett, and his Berkshire Hathaway investment vehicle are holding US$325 billion in cash. Reportedly, this is double the amount held at the end of 2023. Is this a sign that we should now tread warily with the stock market at a record high?
For the record, the S&P 500 ended Friday at 5694.34. It’s now up 30.93% for the past 12 months and 66% since the low in October 2022.
The market fell from around 5766 in late 2021 to 3583, after the Fed started its rate rise cycle. That was a bear market with a 22% plus slide for the S&P 500, which is the best index to measure the US share market.
We’ve seen huge gains over a 10-year period of around 188% (or 18.8% a year) that defies the history of the US stock market. Over the same time, the S&P 500 Equal Weighted Index was up 130% (or 13% a year, which is much closer to the average rise of stock markets of about 10% a year).
While the gains are historically high, we have been living through historically unique times. And the S&P 500 has lived through exceptional times, with an 18.8% gain a year but it has been over-driven by the Magnificent Seven tech stocks — Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla.
In the past 10 years, Apple is up 344%. Nvidia is up 2,593% in five years and the 10-year rise is off the charts! Yep, these have been exceptional times for these exceptional companies that are not only tech companies, but (apart from Tesla) are what economists call price inelastic businesses. In simple terms, this means we’re very dependent on them. (Tesla is price inelastic for Tesla devotees but China is producing many electric vehicle (EV) rivals, though that hasn’t stopped Tesla’s share price going up 1,488% over five years!)
Think of Apple users who use Microsoft for emails every day, go to Facebook (Meta), use Google (Alphabet), buy from Amazon, benefit from AI driven by Nvidia chips and possibly drive to work in a Tesla!
People with non-Macs undoubtedly live the same lives with the Magnificent Seven companies.
This an exceptional time for exceptional businesses that have created exceptionally rising stock markets.
Of course, there will be a market crash one day, remembering the last one was only two years ago, starting in October 2022 as interest rates rose. But remember that since 1932 the average life span of most US bull markets has been 3.8 years.
But there’s another statistical take on US bull markets worth noting: “Since 1957, the average bull market has lasted nearly five years and generated an average S&P 500 return of more than 169%. Bull markets have historically performed best during the first year following the previous bear market bottom, averaging a 41.8% gain.” (Forbes.com)
S&P 500 Bull Markets 1957 to 2022
Given this, it’s fair to say that this bull market isn’t historically old, but the gains have been historically significant, so this could be a short bull market like the 1966-68 one. (See table above.)
On what Buffett is up to, he’s confessed he doesn’t have an accurate crystal ball on when a bull market ends but the AFR looked at the knowledge of Buffett of Bloomberg’s Nir Kaissar. This is what he revealed: “The record shows Buffett consistently raising Berkshire’s cash allocation as stock valuations rise during booms — and expected returns consequently decline — and drawing down cash as opportunities arise. It also confirms that Buffett has little talent for market timing, as he readily admits”.
As we have a big boom, Buffett is building up cash. This is what he does so it doesn’t mean he thinks the boom will end soon but he’s taking profit ahead of at least a pullback (or maybe a crash).
Is a crash imminent?
Therefore, the next question has to be this: is a crash imminent? I think a pullback is on the cards and any stories about inflation remaining sticky and the Fed delaying or halting rate cuts would trigger a sell-off of stocks.
Also, when December reporting season is revealed early next year, there could be news that could spook Wall Street. But I’m not so sure. I suspect the promise of Trump and lower taxes, and deregulation could help many company outlook statements, thought tariff threats will have the opposite effect.
What are the bullish calls on this market?
That’s enough on the cautious cash plays. Let’s look at the bullish calls on this bull market. The Wells Fargo investment team has been grabbing the headlines with an S&P 500 call of 6600 by the end of 2025. That implies a 10.5% gain, which incidentally has been the kind of guess I’ve been sharing with my financial planning clients, who’ve had two huge years in returns that have even surprised me!
This is the guts of the Wells Fargo view on stocks:
- The strength of the US economy
- Trump’s deregulation push
- Combined, the two factors above then help company earnings.
However, these guys aren’t alone in tipping a solid 2025. “Wells Fargo is the latest big firm to release its 2025 S&P 500 year-end target, with virtually all shops thus far anticipating a roughly 10% gain or more for the broad market index,” reported CNBC’s Sarah Min.
Goldman Sachs is tipping the S&P 500 at 6500 by year’s end, while BMO Capital is at 6700.
Of course, stock markets don’t behave in a straight line, so our analysis has to be dominated by our views on short-term and long-term investing priorities.
I like this analysis in a Forbes.com article by Kenley Scott, Director, Global Sector Strategist at William O’Neil + Co. “We have two conclusions from our historical analysis. First, the current up leg that began in October 2022 is long in the tooth and ripe for some sort of meaningful pullback,” he explained.
(Timewise, this bull market is short, but it is “long in the tooth” in terms of the huge gains in a short time.)
But his final point reinforces my argument and Wells Fargo’s about being positive about 2025. This is what he added: “However, our second conclusion is that a down leg should be viewed as a buying opportunity as this bull market greatly lags its predecessors in terms of both length of time and in total return. If history is an indicator, then we believe investors can look forward to significantly higher gains before this bull market ends.”
I will run with that, and it makes my US plays via these listed vehicles IHVV, WQG, WCMQ, Magellan’s MHG and other global funds.
As you’ve heard me say before, locally I like EX20, especially as the US market showed the rotation out of big tech into small- and mid-cap companies and businesses that are more a part of the real world were speeding up.
How do I know that? On Friday, the Dow was up 0.97%, the S&P 500 pushed up 0.35% and the Nasdaq gained a lower 0.16%, while the small cap Russell 2000 index was up a whopping 1.8%!