The Week Ahead – Red, White, & Blue… Tried & True

Welcome to “The Week Ahead” where we take a moment to provide our thoughts on what we can expect in markets and the economy during the upcoming week.

23 Winter Olympic medals were won by the U.S.A. this year at Pyeongchang! As always, there were plenty of surprises (first ever gold in men’s curling!) and classic steady mainstays (Shaun White in the halfpipe). This past week we got a taste of another classic in the financial markets, as Warren Buffet’s Berkshire Hathaway released another of one of their annual letters. As always, there are some great thoughts and comments within the letter and I want to share a few of them.

On stocks:

“Charlie and I view the marketable common stocks that Berkshire owns as interests in businesses, not as ticker symbols to be bought or sold based on their “chart” patterns, the “target” prices of analysts or the opinions of media pundits. Instead, we simply believe that if the businesses of the investees are successful (as we believe most will be) our investments will be successful as well. Sometimes the payoffs to us will be modest; occasionally the cash register will ring loudly. And sometimes I will make expensive mistakes. Overall – and over time – we should get decent results. In America, equity investors have the wind at their back.”

On leveraging to own more equities:

“Berkshire, itself, provides some vivid examples of how price randomness in the short term can obscure long-term growth in value. For the last 53 years, the company has built value by reinvesting its earnings and letting compound interest work its magic. Year by year, we have moved forward. Yet Berkshire shares have suffered four truly major dips. Here are the gory details:

This table offers the strongest argument I can muster against ever using borrowed money to own stocks. There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small and your positions aren’t immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions. In the next 53 years our shares (and others) will experience declines resembling those in the table. No one can tell you when these will happen. The light can at any time go from green to red without pausing at yellow.”

The risk in fixed income today:

“Investing is an activity in which consumption today is foregone in an attempt to allow greater consumption at a later date. “Risk” is the possibility that this objective won’t be attained.

By that standard, purportedly “risk-free” long-term bonds in 2012 were a far riskier investment than a long-term investment in common stocks. At that time, even a 1% annual rate of inflation between 2012 and 2017 would have decreased the purchasing-power of the government bond that Protégé and I sold.

I want to quickly acknowledge that in any upcoming day, week or even year, stocks will be riskier – far riskier – than short-term U.S. bonds. As an investor’s investment horizon lengthens, however, a diversified portfolio of U.S. equities becomes progressively less risky than bonds, assuming that the stocks are purchased at a sensible multiple of earnings relative to then-prevailing interest rates.

It is a terrible mistake for investors with long-term horizons – among them, pension funds, college endowments and savings-minded individuals – to measure their investment “risk” by their portfolio’s ratio of bonds to stocks. Often, high-grade bonds in an investment portfolio increase its risk.”

The week ahead is one of the busiest that we’ve seen so far this year with a ton of economic data being reported. The main event, however, will be new Fed Chair Powell providing the Fed’s semi-annual monetary policy testimony to Congress. With last week’s FOMC minutes revealing increasing conviction by the Fed that they could continue to raise rates without interrupting the current economic environment, investors will be looking to see if any further guidance could be gleaned by his speech and – more importantly – during the Q&A session. Another inflation reading via PCE will be given later in the week, which could further affirm the current rate hike path.

Data deck for February 24 – March 2: