One of Warren Buffett’s many famous quotes is to be fearful when others are greedy and greedy only when others are fearful. Underlying this investment truth is a recognition that markets don’t move in a straight line. Instead, while the general direction may be higher (and has been for equity markets to the tune of 9% annually over the last 100 years), markets ebb and flow based on 1. Current fundamentals and 2. Expectations of future conditions.
Considering the first input, the current environment appears healthy. Unemployment remains low (4.2%), inflation is far lower than in recent years (though stubbornly above the Fed’s 2% target), and Gross Domestic Product (GDP) grew 3% in the second quarter. Consumer credit is healthy and for the 60% of Americans who own their homes, there is a war chest of home equity north of $10 trillion that has padded the homeowners balance sheet just since the pandemic began.
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