The U.S. stock market continues to be a highly valued but viable alternative to bonds, which have very low yields.
Among U.S. stocks, we favor technology companies, and if interest rates rise over the next few months, banks, which will be the beneficiaries of slowly rising interest rates.
Volatility Will Increase
Whether inflation or deflation wins the day longer-term, world political, economic and military events argue for investors to be prepared for increasing volatility in markets in months and years to come. We recommend that investors hold some investments that will benefit if markets experience more waves of volatility in coming months.
Currencies
While we expect European currencies to move sideways or fall versus the U.S. dollar, we believe that growth in Europe will slow due to the weakness of the European banking system. Another drag on growth will be further concerns about the ultimate political viability of the EU, as new Eurosceptic parties make gains in many European countries. (Hungary’s recent referendum rejecting the EU’s migrant resettlement program could lead to troubles between the EU and several of its eastern European members.)
We discuss the current Deutsche Bank (DE:DBKGn) issue above, but Deutsche Bank is only one of many weak European banks.
The U.S. dollar is a key. If the U.S. dollar begins to break out as indicated by a rise in the DXY dollar index above the highs of early 2016 at 101, the U.S. market will have problem exporting goods and services. We suggest that investors watch this key index, which is currently at 96.
We believe that the British pound will decline versus the U.S. dollar over the next several months.
Emerging Markets Continue a Slow Increase as Money Flows In
Undervaluation and very low valuations when compared to developed markets have allowed emerging markets to move ahead in the last few weeks. Although those emerging markets which supply raw materials continue to struggle with exports, and the manufacturing-based markets are also seeing slow export volumes, many EM countries are slowly recovering from the poor stock market performance from 2011 until the beginning of 2016. In recent months, attention has been directed toward these markets because of their substantial undervaluation compared to developed markets, and due to the economic growth rates of China and India.
This week, India lowered interest rates in response to lower inflationary pressures. Inflation has declined due to lower oil prices compared to last year, and due to a good monsoon, which has decreased food costs and improved farm incomes. Lower interest rates are expected to spur investment and economic growth in India. One way to play the continued growth of India over the long term is Indian index ETFs; one of several is the PowerShares India ETF (NYSE:PIN). Investors can gain exposure to global emerging-market stock markets through many ETFs including the Vanguard FTSE Emerging Markets ETF (NYSE:VWO). We hold these two positions as recommendations in our letter.
Gold and silver have broken down technically, and new commitments should be avoided until they near their support, which most technicians believe is between $1200 and $1240/oz for gold.