I hope everyone had a great weekend and that you are looking forward to the Golden Week holiday. Unfortunately I’m stuck in Shanghai but we should have some nice weather to enjoy.
Getting on to last week’s action: On Wednesday, the Japanese central bank expanded its intervention and it is now clear that all the major central banks are trying to stimulate the world’s economy. Make no mistake, this policy intervention is unlikely to spur economic activity, however this money creation will probably boost asset prices. After all, when it comes to investing, monetary policy trumps everything else and the risk free rate of return determines the value of all asset prices. Today, most of the world’s central banks are easing and interest rates are likely to stay artificially suppressed for years. Thus, this environment is favorable for risky assets and in our view, stocks, precious metals and high yield credit will continue to rally over the following months.
Housing Recovery
Whether you like it or not, the Federal Reserve wants to save the financial institutions and its open ended QE program will remove the mortgage backed securities from the banks’ balance sheets. Furthermore, it is conceivable that this new stimulus will lower borrowing costs and assist America’s housing recovery. Unfortunately, there is no such thing as a free lunch and the ongoing debasement of the US Dollar will inevitably reduce the purchasing power of the world’s reserve currency. Thus, from an investment perspective, we believe that investors should reduce their exposure to cash and invest in growth stocks, precious metals and high yield fixed income securities.
Turning to Wall Street, the major US indices are currently digesting their recent gains and after a brief pause, the ongoing advance should continue. It is notable that the biotechnology, consumer discretionary, consumer staples and healthcare sectors have already climbed to all- time highs and this confirms that they are now in a secular uptrend. Remember, the American stock market has done nothing for over 12 years and due to the ongoing money creation, it is possible that Wall Street could advance for several years. Furthermore, it is worth noting that the S&P500 Equal Weighted Index, S&P400 Mid Cap Index, S&P600 Small Cap Index and Value Line Arithmetic Index have also climbed to all-time highs and such broad participation suggests that it is only a matter of time before the Dow Jones Industrial Average and the S&P500 Index also join the secular uptrend.
Chinese Economy Slows
Despite the fact that American stocks have been rallying for over 3 years, the current sentiment is extremely negative and it is astonishing that retail investors have been net sellers of equity mutual funds for five straight years! If history is any guide, such revulsion towards equities suggests that we are nowhere near the end of this stock market uptrend. Given the state of the global economy, we maintain our view that industrial commodities will continue to disappoint investors. It is also pertinent to note and be reminded that the Chinese economy is slowing down rapidly and under this scenario, the trend for the industrial commodities will remain down.
In the precious metals arena, it appears as though both gold and silver are consolidating their recent gains and after some additional volatility, their prices should appreciate. In terms of price levels, gold’s close above US$1,781.80 per ounce and silver’s close above US$35.10Gold Mining per ounce will confirm the end of the ongoing consolidation and open up the possibility of a major advance which may last until spring. As far as the precious metals miners are concerned, the trend remains firmly up and large gains could be achieved over the following months. And as I mentioned in an earlier letter, junior gold mining stocks continue to power forward up over 25% over the last couple of weeks but are still well below their one year high, so there is still room to push higher.
Finally, over in the bond market, it appears as though the long dated US Treasury securities will depreciate and capital will probably flow towards high yield credit and peripheral European bonds. Thus, during this rally in risky assets, income seeking investors may want to shun safe haven assets and search for yield.
For our investors – remember to hold a balanced portfolio and talk with your advisor about any repositioning to take advantage of markets at this time. For more updates on the world financial news please visit our Weekly Global Economic Outlook.
Have a great week ahead. We’ll be back following a brief one week hiatus for the National Holidays here in China.
Co-Head of Portfolio Management,
Bill Longstreet
Austen Morris Associates Wealth Management & Investment Team
www.austenmorris.com
