American Companies “Often Discover Solutions”

“Paper money can lose its value if fiscal irresponsibility takes hold,” he added. “In some countries, this reckless behavior has become a norma, and throughout our nation’s brief history, the U.S. has approached the brink. Fixed-coupon bonds offer no shield against soaring currency values.”

“While businesses are not entirely insulated from new challenges, history has consistently shown that they can swiftly adapt and evolve in their relentless journey towards growth. (This was discussed in last week’s TKer.)

“Businesses, along with individuals possessing sought-after skills, usually find ways to navigate monetary instability as long as their offerings remain in demand among the citizenry,” Buffett remarked. “I have always relied on the success of American businesses, and I will continue to do so.”

This should not imply that stocks will only rise from this point.

Buffett himself would be the first to admit that he has “not been adept at market timing.”

In fact, one of his most optimistic writings, a New York Times op-ed titled “Buy American. I Am,” was published just before the S&P 500 plummeted an additional 26% before bottoming out in March 2009.

However, the premise of his article ultimately proved accurate, and those who invested in U.S. equities at that time thrived in the subsequent years.

The vision of American capitalism that Buffett advocates isn’t solely centered on how companies innovate great products and services. Instead, it highlights their unparalleled ability to overcome challenges that often seem insurmountable.

While investors should remain prepared for short-term fluctuations, they must also keep their eyes on the long-term horizon, which continues to be favorable.

Several significant data points and macroeconomic events have emerged since our last review:

Home sales decline. Sales of previously owned homes fell by 4.9% in January, reaching an annualized rate of 4.08 million units. According to NAR chief economist Lawrence Yun: “Mortgage rates have stayed static for several months despite numerous short-term rate cuts by the Federal Reserve. Coupled with high home prices, housing affordability is still a critical issue.”

Home prices decrease. The prices of previously owned homes have decreased from last month but remain higher than they were a year ago. According to NAR: “The median sales price for existing homes across all types was $396,900 in January, a 4.8% increase from last year’s $378,600.”

Homebuilder sentiment falls. According to NAHB’s Carl Harris: “While builders remain hopeful for pro-development policies, particularly regarding regulatory reforms, uncertainty surrounding policies and cost factors have led to a reset of expectations for 2025 in the most recent HMI. Uncertainty related to tariffs has depressed builders’ expectations for future sales to the lowest level since December 2023. The use of incentives may also be waning as a sales tactic due to elevated interest rates reducing the pool of eligible buyers.”

New home construction starts decrease. Housing starts dropped by 9.8% in January, reaching an annualized rate of 1.37 million units, according to the Census Bureau. Building permits saw a slight rise of 0.1% to an annualized rate of 1.48 million units.

Mortgage rates decrease slightly. According to Freddie Mac, the average 30-year fixed-rate mortgage fell from 6.87% to 6.85% this week. According to Freddie Mac: “Mortgage rates have seen a slight decline this week. The 30-year fixed-rate mortgage has remained just below 7% for five consecutive weeks, fluctuating less than 20 basis points during that time. This stability is encouraging for potential buyers and sellers as the spring buying season approaches.”

In the U.S., there are 147 million housing units, with 86.6 million being owner-occupied, and 34 million (or 40%) having no mortgage. Almost all homeowners with mortgage debt have fixed-rate mortgages, most of which were secured before rates surged from their 2021 lows. This suggests that most homeowners are not extremely sensitive to changes in home prices or mortgage rates.

Unemployment claims increase. Initial claims for unemployment benefits rose to 219,000 in the week ending February 15, up from 213,000 the previous week. This figure remains consistent with levels typically associated with economic growth.

Card spending data remains stable. From JPMorgan: “As of February 14, 2025, our Chase Consumer Card spending data (unadjusted) was up 3.3% compared to the same day last year. Based on the Chase Consumer Card data through February 14, our estimate for the U.S. Census February retail sales control measure month-on-month is 0.33%.”

From BofA: “Total card spending per household increased by 0.5% year-on-year in the week ending February 15, according to BAC aggregated credit & debit card data. Year-over-year total spending in the Midwest seemed affected by snowstorms during the week ending February 15. Additionally, the shift in the Super Bowl date (from February 9, 2025, to February 11, 2024) negatively impacted year-over-year total spending.”

Gas prices remain stable. According to AAA: “Most drivers experienced little change at the pump last week, with the national average for a gallon of gas holding steady at $3.16… New data from the Energy Information Administration (EIA) indicates that gasoline demand fell from 8.57 million barrels per day last week to 8.23 million. The overall domestic gasoline supply decreased from 248.1 million barrels to 247.9 million. Gasoline production also dipped last week, averaging 9.2 million barrels per day.”

Consumer sentiment declines. The University of Michigan’s January Surveys of Consumers reported: “Consumer sentiment continued its early month decline, dropping nearly 10% from January. The decrease was consistent across all age, income, and wealth demographics. All five index components worsened this month, with a 19% drop in perceptions of buying conditions for durable goods, mainly due to concerns about imminent tariff-induced price hikes. Expectations for personal finances and short-term economic outlook both decreased by almost 10% in February, while the long-term economic outlook fell about 6% to its lowest level since November 2023. Sentiment fell for both Democrats and Independents, while it remained unchanged for Republicans, highlighting ongoing divisions regarding the impact of recent economic policies.”

CEOs express growing optimism. The Conference Board’s CEO Confidence index showed increased optimism for Q1 2025. From The Conference Board’s Stephanie Guichard: “The improvement in CEO Confidence in the first quarter of 2025 was notable and widespread. All components of the measure enhanced, with CEOs significantly more optimistic about current and future economic conditions, both in general and within their own sectors. CEOs’ evaluations of current conditions in their industries also improved. (This measure is not part of the topline Confidence measure). In light of an improved outlook, there was a significant rise in the number of CEOs planning to boost investment and a decrease in those looking to curtail investment plans. However, a majority of CEOs reported no changes to their capital spending plans over the next 12 months.”

Professional concerns persist. According to BofA’s February Global Fund Manager Survey: “39% of investors in February’s FMS identified a recessionary trade war as the largest ‘tail risk,’ surpassing inflation-induced Fed hikes (31%) and followed by the AI bubble (13%).”

Office occupancy rates remain relatively low. From Kastle Systems: “The highest office occupancy day peaked at 61.2% last Tuesday, a 2.1-point decrease from the prior week. Winter weather affected employee attendance in Washington, D.C., Chicago, and Philadelphia, with Wednesday occupancy dropping by 36.1 points, 22.3 points, and 13.9 points, respectively. San Jose hit a new record high for single-day post-pandemic office occupancy at 64.5% on Tuesday. The average low for the week was 36.4%, an increase of six-tenths of a point from last week.”

Surveys indicate a slowdown in activity. According to S&P Global’s February Flash U.S. PMI: “The initial optimistic atmosphere among U.S. businesses at the onset of the year has dissipated, transitioning into a more somber view characterized by increasing uncertainty, stagnation in business activities, and rising prices. Sentiment about the prospects for the year has dropped from near three-year highs at the start of the year to one of the bleakest since the pandemic. Companies express concerns about the effects of federal government policies, ranging from spending restrictions to tariffs and geopolitical issues. Sales are reportedly suffering due to uncertainty stemming from the shifting political landscape, with prices increasing due to supplier-raised tariffs.”

It’s essential to recognize that during stressful times, soft survey data typically reflects exaggerated perceptions compared to actual hard data.

Short-term GDP growth projections remain positive. The Atlanta Fed’s GDPNow model predicts real GDP growth at a 2.3% rate for Q1.

The long-term outlook for the stock market stays bright, buoyed by expectations of sustained earnings growth over the years. Earnings are fundamentally the most significant driver of stock prices.

The demand for goods and services remains strong, and the economy continues expanding. Concurrently, economic growth has moderated from earlier phases of rapid expansion. The economic landscape feels less “coiled” these days as major boosters, such as an abundance of job openings, have lessened.

To be clear: the economy is still robust, underpinned by resilient consumer and business finances. Job creation is still on the rise. The Federal Reserve, having handled the inflation crisis, is now focused on enhancing labor market stability.

We’re in a unique phase where hard economic data appears to be disconnected from softer sentiment-driven data. Both consumer and business sentiment remain relatively weak, even as actual consumer and business activities continue to grow and reach record levels. From an investor’s standpoint, what matters is that tangible economic data remains strong.

Analysts predict that the U.S. stock market may outperform the U.S. economy, primarily due to favorable operating leverage. Since the pandemic, businesses have made significant adjustments to their cost structures through strategic layoffs and investments in new technology, especially AI-powered equipment. These changes create positive operating leverage, meaning slight sales growth in a waning economy translates into significant earnings growth.

Of course, this doesn’t mean we should grow complacent. Risks always loom — including U.S. political instability, geopolitical conflicts, energy price swings, cyber threats, and more. Additionally, there are unpredictable elements. Any of these risks could spike and trigger short-term market volatility.

It’s a sobering fact that economic downturns and bear markets are occurrences that every long-term investor should be prepared for as they build wealth. Keep your stock market seat belts fastened.

For now, there’s no need for concern that the economy and the markets can’t ultimately weather any challenges that arise. The long-term perspective remains undefeated, and it’s a winning trend that long-term investors can expect to persist.

This article first appeared on TKer.co