The March 2020 market crash was a stunning reminder that economic predictions aren’t foolproof. “Black swan” events like the COVID-19 pandemic can have a sudden, devastating impact on the market. Support from lawmakers and fast action from the Fed kept the crash from becoming a long-term economic disaster.
Changes in monetary policy stabilized the market, and far-reaching stimulus packages ensured that unemployment and illness didn’t plunge vast swaths of the population into deep poverty. Interest rates dropped, and a series of actions injected cash into the economy. Meanwhile, a variety of government-funded programs such as cash payments and enhanced unemployment benefits put money in people’s pockets.
These tactics worked short-term — unemployment stayed in check, and the housing market soared. However, it seems the plan was a bit too effective. For the 12-month period ending March 2022, inflation hit 8.5% — the highest it has been in 40 years. The Russian invasion of Ukraine certainly didn’t help matters. Oil prices spiked in early March, driving up the cost of fuel nationwide.
Oil prices have started to drift down again, and the Fed is tightening monetary policy and raising key interest rates. Unfortunately, it appears that these moves are coming too late to prevent a recession. After months of debate, economists and market analysts have started to agree on one thing. All signs point to a market correction, and recession is likely to follow.
The severity of a potential market crash and the length of any recession that might follow is still under dispute, but for most investors, one thing is certain: Now is the time to reevaluate portfolios and prepare to withstand the volatility that is likely on its way.
Ten financial advisors might give 10 different answers when it comes to the best way to protect against a market crash, but all would agree on one point: There is one rock-solid stock that can be counted on to remain reasonably stable if the market tumbles.
What Goes up When Interest Rates Go Up?
Rising interest rates mean that it costs more to borrow money. Specifically, banks pay more to borrow, and they pass that expense on to consumers. A couple of things can happen as a result. First, people are less likely to take out loans and use lines of credit. That means fewer purchases — especially when it comes to big-ticket items like real estate and cars.
Second, when interest rates go up and incomes don’t, borrowed money doesn’t stretch as far. Monthly payments are heavier on interest, so consumers can’t afford as much as they might have during low-rate periods.
Meanwhile, the financial institutions making the loans enjoy higher profits. The spread between what they pay to depositors in interest and what they charge to borrowers in interest grows. What goes up when profits go up? Financial stocks like Bank of America, Wells Fargo, Bank of New York Mellon, and U.S. Bancorp. Who has a stake in all of those companies? Warren Buffett’s Berkshire Hathaway.
What Goes up When Inflation Is High?
Inflation is measured through the Consumer Price Index (CPI), a theoretical “basket” of goods and services that average urban consumers shop for regularly. There are 80,000 items in the “basket” that range from grocery store staples to gas and utilities. One of the themes that ties CPI goods and services together is the fact that they are typically must-haves rather than nice-to-haves. Consumers will continue to buy them when prices go up, even in a recession.
Who wins when inflation is high? The companies that produce, manufacture, and distribute must-haves. Examples include Coca-Cola, Kraft Heinz, Verizon Communications, and Occidental Petroleum Corporation. Who has shares in all of those companies? Warren Buffett’s Berkshire Hathaway.
The Best Stock To Own if the Market Crashes
Berkshire Hathaway is a holding company led by legendary value investor Warren Buffett. Since 1965, Buffett has carefully curated a portfolio of stocks and other assets that demonstrate consistency, resilience, and an ability to bring in cash regardless of economic circumstances.
At 44.2% of total holdings, Apple is Berkshire Hathaway’s biggest investment. Other companies that make up Berkshire Hathaway’s top five include Bank of America (11.5%), American Express (7.8%), Coca-Cola (7.4%), and Kraft Heinz (3.9%). Keep in mind that the total value of Berkshire Hathaway’s portfolio tops $350 billion, so at 3.95, Buffett’s stake in Kraft Heinz has a current market value of $13.6 billion.
Among other goals, Berkshire Hathaway’s stock portfolio is built to withstand market volatility. That’s why the company was able to recover relatively quickly after the March 2020 market crash. If the market tumbles again, Berkshire Hathaway stock might go down — but shareholders are likely to recover those losses faster than peers who put their money into start-ups, tech disruptors, and other speculative assets.
What Is Special About Berkshire Hathaway?
The beauty of Berkshire Hathaway stock is that it combines the benefits of mutual funds and exchange-traded funds (ETFs) without the disadvantages. Essentially, each share of Berkshire Hathaway offers investors instant diversification since the underlying portfolio contains a mix of industries, geographies, and market caps.
However, unlike ETFs, Berkshire Hathaway stock doesn’t rely on an index — it more closely resembles an actively managed fund. But, unlike actively managed mutual funds, Berkshire Hathaway investors aren’t paying fees and commissions. They get the value of Warren Buffett’s expertise baked into the price of Berkshire Hathaway stock.
Bottom line? The number one rock-solid stock if the market tumbles is Berkshire Hathaway.