What Warren Buffett’s Bank of America selling spree is telling us

In recent months, Warren Buffett’s Berkshire Hathaway (NYSE: BRK.A) has been on a selling spree for the investment conglomerate’s stake in Bank of America (NYSE: BAC), raising eyebrows in the financial markets.

As things stand, Berkshire now holds about 9.97% of BofA’s stock, reflecting about 7.689 billion shares. According to October 18 filings with the Securities Exchange Commission (SEC), the company offloaded 8.7 million shares for about $370 million in the latest transaction. 

Now, economist Henrik Zeberg views this sustained sale as a possible warning regarding the prospects of the economy and the overall health of the banking space, as he noted in an X post on October 20. 

Part of Zeberg’s outlook was based on data indicating that unrealized losses at U.S. banks have soared seven times higher than during the 2008 financial crisis.

These losses, stemming from investment securities that have lost significant value, suggest that the banks may be operating under an environment of financial instability. For instance, this can be tied to the recent surge in interest rates and the mismatch between bond market values and the banks’ held securities. 

The grim outlook can also be deduced from the regional banks, as represented by the KRE index. In this case, the banks have only experienced a temporary bounce since the panic in May 2023, following concerns over banking instability. Zeberg suggested that this relief rally is likely nearing its end.

Why Buffett is selling BAC shares 

Therefore, Warren Buffett, known for his long-term investing strategy, has been shedding his position in Bank of America, one of the largest financial institutions in the world. These actions could be seen as a signal that the problems in the banking sector may be worse than currently understood. 

“Ready for financial crisis part II? Extreme unrealized losses in US Banks. <…> And Warren Buffett is selling his Bank of America shares. Recession is coming,” Zeberg said. 

The economist also noted that the SPDR Financial Sector ETF (XLF) analysis might point to turbulent times ahead. According to the analysis, there is a sharp rise into what he identified as a “rising wedge” pattern, a bearish signal often preceding significant market declines. 

More troubling is the divergence between price movement and the Relative Strength Index (RSI), a key indicator of weakening momentum. With all these factors, he hinted that the financial world could be heading into turbulent waters again. 

Prospects of a recession 

Indeed, several theories have been put forward regarding Buffett’s offloading of his stake in BAC, which has contributed to the ‘Oracle of Omaha’ amassing one of the largest cash piles in the company’s history. 

For instance, Tesla (NASDAQ: TSLA) CEO Elon Musk believes this could signal Buffett’s preparation for a possible stock market crash, which he believes is likely to happen if Kamala Harris is elected amid fears the Democratic party candidate might be a risk to equities. 

These recession concerns coincide with when the Federal Reserve enacted its first rate cut in four years, lowering the rate by 50 basis points. To this end, the stock market has seen a resurgence, with the S&P 500 index soaring to new highs alongside commodities such as gold. 

In this case, Zerberg maintains that the probability of recession remains on the horizon, and it will hit after markets surge to record highs.

Meanwhile, for those anticipating a recession, the question has been the timing of the possible economic downturn, with metrics such as the unemployment rate hinting at the possibility of the next three to six months.