Preparing for more market turbulence

The US is always a key marker for economic recovery.  This year, the NASDAQ is up 270 percent since the markets bottomed out in March 2008 and the NYSE is up 160 percent. The S&P 500 has climbed more than 210 percent and the Dow Jones Industrial average is up 195 percent.  Why are America’s most influential and wealthiest investors turning their backs on US stocks and what does this mean?

Over the past two years Warren Buffett’s holding company, Berkshire Hathaway, has been reducing its exposure in American Stocks that rely on consumer spending.  The company has sold stock in Johnson & Johnson, Kraft Foods and Proctor & Gamble. Berkshire Hathaway has, however, increased its exposure significantly in Wells Fargo, American Express and Bank of NY Mellon: companies Buffett believes will do well in a correction.

Equally, George Soros, the Chair of Soros Fund Management, sold more than a million shares across its holdings in several banking giants in the first quarter of 2014, including JP Morgan, Bank of America and Citi.  Despite the stock market’s record run and assurances that the economy is improving, it appears that we are in for a rough year ahead.  Whilst unemployment rates are low, inflation is set to zero and the economy appears to be picking up, the let down will be a lot harder in reality.  Soros has it appears, lost faith in the US markets. 

In reality unemployment rates remain at unacceptable levels, personal debt remains high and in general, bonuses are down or altogether stagnant. With the Federal Reserve turning away from the low-interest environment of the past few years, which stimulated the economy, the outlook is not good.  The Fed, like the Bank of England in essence made it easy to borrow money and investors turned to the stock market to make money.  However, they are now turning their back on quantitative easing policies and fiscal stimulus programs making stocks once again appear overvalued.  As such companies and in particular consumer led businesses will now have to rely on real revenues and earnings to propel them higher.  

In 2015, the IMF forecast US GDP growth at 3.1 percent, but global growth has been cut to 3.8 percent. Worse still, the knock on effect of China’s recent economic decisions has caused a collapse in the commodities markets and sent shock waves throughout the financial world. With current geopolitical strife in the Middle East and parts of Asia troubles afoot and to boot, the Eurozone is potentially set for another recession.  With 40 percent of public companies in the S&P 500 claiming sales from Europe, this does not bode well.

So the question is – do Buffett and Soros know something and are we wising up to it too?

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