The S&P 500 (^GSPC 0.94%) has rebounded sharply from its bear market lows, but the benchmark index is still 9% below its record high, and the economy is sending mixed signals about where the stock market is headed next.
Read on to see why some investors are bullish and others are bearish, and pick up a few potentially life-changing tips from Warren Buffett.
Is the stock market headed higher or lower?
Some signals point to the stock market soaring higher. The U.S. economy expanded at its fastest pace in two years during the third quarter. Unemployment remains well below the long-term average, and wages are increasing faster than inflation.
Additionally, analysts expect revenue and earnings growth to accelerate across the S&P 500 next year, and the number of companies that have mentioned “recession” on earnings calls has declined for four consecutive quarters.
However, some signals point to a stock market drawdown in the offing. Surging bond yields could lure investors away from equities and stifle economic growth by raising borrowing costs for businesses. The Federal Reserve has also intimated that interest rates will fall more slowly than previously anticipated, which could choke the economy into a recession.
Building on that, a closely watched section of the U.S. Treasury yield curve has been inverted for the past year, and such events have accurately predicted every recession since 1955, with only one false positive. The S&P 500 declined by an average of 31% during those recessions.
Suffice it to say, investors are being bombarded with mixed economic signals, which makes it easy to overthink or second-guess decisions.
Warren Buffett’s investing advice
Warren Buffett has built Berkshire Hathaway (BRK.A 0.66%) (BRK.B 0.80%) into one of the largest businesses in the world, and he has amassed a $100 billion fortune in the process. That success makes him an excellent source of economic insight and financial wisdom.
Detailed below is an overview of Buffett’s investment philosophy, pulled together from various shareholder letters, SEC filings, and interviews.
The processes described above are very involved. Buffett once said that “successful investing takes time, discipline, and patience.” But most people probably don’t want to spend a lot of time researching stocks. Fortunately, Buffett has pounded the table on a much simpler investment strategy for decades.
Warren Buffett recommends an S&P 500 index fund
Buffett believes most people should consistently buy an S&P 500 index fund. That strategy spreads capital across many of the most influential businesses in the world — companies Buffett says “are bound to do well” in aggregate over time — and it requires almost no work.
Better yet, Buffett believes that know-nothing investors “can actually outperform most investment professionals” by periodically buying an S&P 500 index fund.
Historical data backs that assertion. Less than 8% of large-cap funds have outperformed the S&P 500 over the last 15 years, meaning most money managers could have saved themselves a lot of effort (and earned higher returns for their clients) by simply buying an S&P 500 index fund.
This content was originally published here.
