This month’s MarketCycle’s Musings is merely me ‘talking to myself.’
1) Where are we in the market cycle?
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The United States is in the late-stage along with Australia, Canada, South Korea and the United Kingdom. Japan, Brazil, China, India and most of Europe are still in the middle-stage of the market cycle. When the U.S. enters economic-recession, all global countries, including those still in the middle-stage, will be pulled down with it. As goes the United States stock market, so goes the globe.
When it comes to finding future business champions, Warren Buffett and Charlie Munger have really excelled over the past seven decades. Q3 2021 hedge fund letters, conferences and more One could argue that these two individuals are some of the best growth investors of all time, thanks to their ability to spot companies like Coca-Cola Read More
2) Strong regions and countries have strong currrencies; where is the strength?
The U.S. Dollar (USD) and Emerging Market currencies are strong long-term. The Euro and Yen are weak long-term. The short-term price is always volatile so it is best to ignore short-term currency price direction when determining where to invest.
3) Which region is strongest in regards to relative strength (how strong one region is as compared to a contrasting region)?
As of very recently, Emerging Markets have become stronger than all Developed Markets, including the United States. Of particular interest are China and India (Chindia), which are NOT commodity producing countries. Most Emerging Market countries are considered commodity producers, but China is a manufacturer and India is services centered.
4) Which is near-term stronger, bonds or stocks?
As of the past couple of months, bonds have a stronger relative strength than do stocks, so it might help to hold some extended-duration U.S. Treasury-bonds in one’s portfolio. Since bonds can profit (or gyrate sideways) when stocks go up in value but then profit a lot when stocks lose value, they offer hedging protection against falling stocks with zero or minimal cut into stock gains. Bonds also pay interest which makes them a double win. I expect that this bond strength may continue into mid-Fall of this year.
5) If the market corrects (note: I’m not saying a bear market), what is the likely amount of the drop and what is the likely time-frame?
The market has gone over one year without a 5% correction and this is very unusual. There is some minimal breakdown in market breadth, meaning the strength of market internals. I expect that we may (may!) get a 10% temporary drop sometime before mid-Fall. If one is hedging with T-Bonds, then the bottom of a drop of this size would be a good time to sell the T-bonds and put the money back into stock positions, perhaps Emerging Market stocks (and with no more than 20% of one’s portfolio).
6) Are we still in a cyclical bull market for stocks considering that the chances of a market correction have increased in the near-term?
Yes, we’re still in a cyclical bull within the confines of a strong secular bull and remember that the market cycle has nothing to do with ‘news’ or politics. We are in the late-stage which makes it more difficult to beat the general market. Stock selection should emphasize: large-cap multi-nationals, quality & profitability, momentum, low-volatility, dividend growers and select sectors.
7) How near are we to a stock market top?
Two of the six things that happen long before a market top have already recently occured. The calculated chance of a recession within the next two months is less than 3%, which is ridiculously low. I still believe that the market may temporarily correct in the near-term and that it then heads higher long- term. An economic recession is still probably more than one year away.
8) Inflation has been dropping for the past six months. What is happening now?
Inflation started rising strongly again during July 2017. This bodes well for Emerging Market stocks. But since Emerging Market stocks are likely to correct even more than the U.S. during the next dip, it may be best to enter this trade after any substantial correction of greater than 5%. Again, Chindia looks interesting.
9) Will MarketCycle warn readers when we finally hit the probable market top? How big could the drop be during the next economic-recession?
No, only clients will be notified of the probable top (and expected bear market) and client portfolios will be repositoned; I expect that the drop will be in excess of 33%, which could be a big loss for most investors. Any investor that knows ahead of time, and that repositions their portfolio, may then be set up to receive a profit rather than a loss during the prolonged recession and this would literally turn investing on its head.
UPDATE on Russian Sanctions that affect Exxon (from the July 1, 2017 blog): In an unusually bipartisan move, Democrats and Republicans both overwhelmingly voted to sanction Russia and thus to block Exxon’s gigantic energy deal. The pro-sanction vote was so high that President Trump would be hard pressed to not sign it into law because Congress would simply over-ride him. Secretary of State and former Exxon CEO Rex Tillerson has been missing in action since the vote. Foreign Policy Journal just reported that a frustrated Tillerson plans to resign at the end of this year. And on the other side of the proposed Exxon/Russian Arctic oil deal is Vladimir Putin, who, after seizing almost all of Russia’s oil and gas, has a personal net worth of $200-Billion (according to recent testimony at the Senate Judiciary Committee)… more than Bill Gates and Jeff Bezos combined. This money-grab would involve the need to money-launder billions of Putin’s Russian dollars into the West and this is something of which Special Councel Robert Mueller would be following the bread crumbs to see if any of it ties in with the Trump empire. Further, the Russian-sanctions would cause more than a minor headache for Putin since much of his money would have found its way into Western banks (and real estate).
MARKET SUMMARY: In the near-term, we have a higher than normal chance of a 5-10% stock market correction and a U.S. Treasury-bond price surge. Long-term, the stock market very likely grinds higher with bonds moving lower. The next economic-recession looks to be more than one year away.
AND, regardless of where you live on the planet, if you are tired of constantly worrying over and monitoring your investment portfolio, contact MarketCycle Wealth Management and let us worry and monitor and protect it for you while you enjoy your life. Those reading this blog on a regular basis know that we are almost always correct in our long-term portfolio positioning.
Thanks for reading!
Article by Stephen Aust, MarketCycle Wealth Management