Last month, the legendary investor Warren Buffett disclosed his growing position in the airline industry. Buffett has sizable positions in all of the four major carriers - American (AAL), Delta (DAL), Southwest (LUV), and United (UAL). 

Why would Buffett invest in a highly cyclical industry when the economic expansion is already into its ninth year - the third longest on record?

The most likely answer is that Buffet has faith in the current economic expansion and does not expect a cyclical downturn anytime soon.

Buffett has also been taking sizable positions in other stocks as well, including technology giant Apple where Buffett recently disclosed a quadrupling of his position.  

With the current bull market already 96-months old and the second longest in history, Buffett's investments can be seen as a statement of his positive stock market outlook. It is well understood that Buffett's investments have the benefit of time on their side, as they are long-term in nature and are held over multiple years. But no one likes to invest at the top, not even a deep-pocketed investor like Warren Buffett!

Buffett's confidence may not be misplaced.

Earnings, Economy and Monetary policy are all aligned favorably for stock market valuations, as we had discussed in greater detail in The Stock Market Is Heading Higher.

With 498 (98%) of the S&P 500 companies reporting their fourth-quarter earnings as of last week, the average growth rate has come in at 4.9%, higher than the 4.6% reported for the prior quarter, as per Factset. This is the first time since Q1:2015, that the market has witnessed two consecutive quarters of earnings growth. Presently, the forward Price-Earnings (P/E) ratio for S&P 500 index is 17.9x. This is higher than the 5-year and 10-year averages of 15x and 14x, respectively. In an upbeat market with a growing risk appetite, the ratio tends to move faster than earnings as it anticipates improving growth. The P/E of 18x is higher than normal, but wouldn't be called euphoric, which tends to presage market turning points.

In fact, while business and consumer optimism have soared to record highs, individual investor optimism has been fairly restrained and running somewhat below average, as per the AAII survey. A contrary sentiment indicator that can be useful at turning points when it indicates extremes, a euphoric Bullish rating is negative for stocks and a depressive Bearish rating is positive.

When professional and individual investors are concerned about market valuations, quite often the market tends to climb the wall-of-worry. This has occurred in the US markets as well. Since November, the S&P 500 index (SPY) has risen 11% and the Nasdaq Composite (QQQ) +12%. Such a relentless rise has raised the probability of a normal pullback. We anticipated a pullback and consolidation during March for we believed the market is underestimating the probability of an interest rate increase later in the month. However, over the past week, the market expectation has readjusted and the probability of an interest rate increase has risen to ~80%, up from 30% about a week ago, as per CME Group.

One notable characteristic last week of the stock market adjustment towards a higher probability of an interest rate hike was how well the market took it in its stride. We believe the market remains in a longer-term uptrend as discussed in our article Stock Market Outlook 2017. 

Small caps and biotechs, which are good gauges of stock market risk appetite, are continuing to perform encouragingly. The Biotech sector, as represented by the Nasdaq Biotechnology Index (IBB), has finally turned around this year and is already up +14% as of the end of February, while our Prudent Biotech Portfolio is up +26%. The Graycell Small Cap Portfolio, which was up +71% last year, is up +10% this year along with the Russell 2000 small cap index gain of +2%. Risk appetite remains healthy.

Last month Buffett's partner Charlie Munger when asked about the Trump Presidency and its economic implications, suggested:

Roll with it. And if there's a little danger what the hell … you're not going to live forever.

This economy has legs, and so does the market!

Warren Buffett sees it!