28 May 2022
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Another stock market slump but what would Warren Buffett do?

Peter Switzer
6 May 2022

Australian business bosses say business is great but Wall Street says it stinks, with the Dow Jones index down over 1,000 points (or 3.5%) overnight and worse still the tech-heavy Nasdaq stock market index slumped 5%!

That’s a stink rating with a capital S. So should that make us prepare for the worst-case scenario of a US recession, more stock market sell-offs and job losses? Or do we listen and take heart from the world’s greatest investor, Warren Buffett, and “…be greedy when others are fearful”?

For those who don’t know much about Buffett, you can sum up his strategy for getting rich on the stock market as this: buy quality companies when the market thinks it’s time to dump them. And the longer you can wait before you take a deep breath and buy into an out-of-love stock, often the shorter will be the pain before a stock market surge tells you that you’ve invested Buffett-style.

In fact, over the weekend, Buffett addressed the timing issue. “At Berkshire Hathaway’s annual shareholders meeting on Saturday, Buffett recommended against obsessing over finding a perfect time to buy a stock,” Megan Sauer of CNBC revealed this week. “Rather, the Berkshire Hathaway CEO said, go ahead and invest, and then observe the stock market over time to see if you should buy more of that company’s stock or sell it.”

And here’s his observation on his own investing over time: “We haven’t the faintest idea what the stock market is going to do when it opens on Monday. We’ve not been good at timing. We’ve been reasonably good at figuring out when we were getting enough for our money.”

This timely advice about when to buy stocks comes when local CEOs, founders and chairmen of local companies are giving our economy and business outlook a big thumbs up. And that’s despite the near homicidal media coverage of what might happen to some Aussies as interest rates rise.

Of course, if the RBA goes over the top in raising rates too many times and too quickly, then we’ll see a long casualty list of sick borrowers who’ll be forced to pull in their belts with their lifestyle, or worse still, be forced to sell their properties. However, all this could be excessive supposition and contrasts with what the likes of NAB’s boss Ross McEwan and Harvey Norman’s Gerry Harvey have told the AFR about what business is like right now.

Yesterday NAB came up with a record $3.38 billion first-half profit, which has McEwan thanking the strong rebounding Aussie economy for the market-impressing result.

Meanwhile, Gerry says consumers aren’t showing any signs of backing off and it follows a huge data result for retail spending this week, which backs up the views of Harvey Norman’s founder and other retailers.

This is what the ABS told us about our shopping:

1. Retail trade rose 1.6% in March after rising 1.8% in February and after lifting 1.6% in January.

2. Retail trade was up 9.4% on a year ago to a record $33.6 billion. 

3. The S&P Global Australia Services Purchasing Managers’ Index (PMI) rose from 55.6 in March to 56.1 in April — the third consecutive month in which business activity rose. A reading above 50 denotes an expansion in activity.

4. And we’ve been shopping for loans, with new home loans rising 1.6% in March to be up 11.1% on a year ago. 

It’s interesting how the rising cost of living is taking centre stage during this election campaign, which of course is important, with inflation making it harder to buy stuff and rising interest rates taking disposable income away from us, but this has to be kept in context.

If someone didn’t suffer a pay cut because of the pandemic and they’re now working a few days at home and saving on costs, then they might be saving on childcare outlays and their home loan rate has gone from an average closer to 4% to under 3%. If this is the scenario, then the Coronavirus impact might be relatively positive in a dollar sense for many.

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And given unemployment is now 4%, there are a lot more households better off because of the government spending that was ramped up to fight that damn virus, as the chart below shows.

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Ignoring the spike because of the initial hit of the virus and the associated lockdowns, unemployment was over 5% but is now 4%. That means over 100,000 Aussies who were unemployed before the pandemic now have jobs.

Gerry Harvey, who has many stores in country regions, says many regional areas are going through a boom, provided they weren’t ravaged by floods. And Macquarie’s CEO Shemara Wikramanayake told the AFR that economic growth would remain solid “because of decarbonisation, digitisation and the availability of capital”.

Another point that should be made is that only a third of Australians have home loans and many of them were made before house prices went ballistically high. And so the borrowers could have lower rate home loans and more valuable homes.

Meanwhile, retirees, at last, will be getting better rates on their savings and I recently noted that Macquarie now has a one-year term deposit at 1.9%.

So how worried should we be about the Wall Street sell-off?

The US is grappling with its inflation threat and the possibility that too many interest rate rises could create a recession. And this hasn’t been helped by the Ukraine war and the Chinese lockdown issues.

I expect negativity and volatility for stocks in coming months but I like what I see in our economy so I expect a positive comeback for markets later in the year. And AMP Capital’s Shane Oliver said the same on my TV show last night.

That said, as Buffett has taught us while timing is hard to get right, investing in quality companies at good prices is a lot easier to pull off.

Check out Shane’s views here. I also look at my favourite bear market indicator, which currently says that stock market bears shouldn’t be seriously troubling us in the near-term future.

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