Berkshire, Metals, Financials, And Gold

Berkshire Hathaway (BRK-B) has not been acting as in the past during the last several years.

Its performance depends on its portfolio.

The business cycle helps to understand the change.

This article looks at the technical performance of the price of Berkshire Hathaway and how it relates to gold, metals, and financial stocks.  

Source: StockCharts.com

The above chart shows the price of Berkshire in the upper panel. The lower panel shows the business cycle indicator as updated in real time. 

The business cycle indicator reflects the decision of business managers to replenish depleted inventories.  A rising business cycle indicator measures the strength of the activities needed to replenish inventories - the purchase of raw materials, hiring of new workers, and the increase of borrowing to finance new capacity and on-going operations.

During such times commodities, wages, interest rates and overall inflation rise. The equity markets respond by favoring industrial, material, financial, and energy stocks. Defensive sectors such as utilities, staples, health care, and bonds underperform the market during this period.

The business cycle peaks because rising interest rates, energy prices, and overall inflation reduce consumers’ purchasing power. The outcome is slower growth in demand. Business does not recognize what is happening and lets inventories build up. 

Eventually rising inventories have a negative impact on profitability. Business is forced to cut production to reduce inventories. It decreases purchases of raw materials, cuts the labor force. It also borrows less to reduce interest costs. The outcome is lower commodity prices, lower wages, and lower interest rates. The result is steadily declining inflation.

During such times sectors such as staples, healthcare, utilities, and bonds outperform the markets. Cyclicals, industrial, metals and mining, and financials underperform the markets.

Despite its phenomenal performance, Berkshire stock responds to the trend of the business cycle. A decline in the business cycle indicator, indicating slower economic growth, is reflected by a slowdown in the price appreciation of Berkshire (see above chart). The sharpest gains in its stock price take place when the business cycle rises and the economy strengthens.

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