Rising Prices Trump Market Worries

08/13/2013 10:00 am EST

Focus: STRATEGIES

Mary Anne & Pamela Aden

Co-Editors, The Aden Forecast

The US's finances are in big trouble, and it's a similar story in most of the other Western developed countries. Nevertheless, the stock markets are chugging along, suggests Pamela and Mary Anne Aden, editors of The Aden Forecast.

But are things really getting better? Unfortunately, the answer is yes and no. In some areas, the economy is indeed improving, but looking under the surface, it's not a pretty picture.

Debt is exploding and it's keeping a lid on growth. It also means more and more dollars are being created out of thin air to pay for the growing, ongoing expenses.

So what should you do? It's important to be flexible, open, and accept the markets for what they are. Recognize that markets aren't as free as they were. Diversify your investments, ideally geographically as well.

You want to keep some core holdings in gold, because it will offset the decline in the US dollar, which will eventually become worth less, as it has over the past few decades.

Keep in mind, this change isn't going to happen overnight. It'll take time, but we're fairly certain what we've seen so far will likely continue. Why? There have been no fundamental changes to indicate otherwise.

Meanwhile, the US stock market is on a roll. It keeps hitting new highs, it's super bullish, and it's likely headed much higher. In fact, US stocks have surged nearly 20% so far this year. This makes them a top global performer, pretty much across the board. Meanwhile, the S&P 500 has chalked up 25 new record highs in 2013.

Reinforcing the bullishness, two Dow theory bull market signals were triggered this past month, when the Dow Jones Industrials and the Dow Jones Transports both simultaneously hit new record highs.

We know this doesn't seem to make sense. But the market doesn't care. It's ignoring the bad news. Instead, the stock market is focusing on the Fed.

The stock market loves the Fed's ongoing easy money. It thrives on it. And the fact the Fed again said they're going to leave their monetary stimulus in place was all the market needed to embark on a renewed bull market upmove.

The old saying, “don't fight the Fed” is playing out almost daily and truer words were never spoken.

Plus, it's not just the Fed. The Bank of Japan, the Bank of England, and the European Central bank are all stimulating too. This is creating a sea of liquidity and as the sea rises, it's taking many of the global stock markets along for the ride.

Many argue that it's all fake. The stock market isn't rising because of sound fundamentals. They say it's artificial and the market's only going higher because of central bank manipulation.

In large part that's true, but the price action is telling the story. That's what we focus on. And regardless of the arguments or reasons why stocks shouldn't be rising, we'll continue to go with the price action. As you know, it essentially trumps everything else.

Also, in the stock market's defense, it does have other bullish factors going for it: the economy has been showing signs of improvement, earnings have been good, and more important, there are few investment options to pick from.

Since most markets are on the decline, or lackluster, the stock market is one of the few markets providing decent returns. So more investors are jumping in, driving prices higher. In addition, stocks are not yet super-expensive based on the historical price/earnings ratio. They remain near average levels.

And even though long-term interest rates are rising, they still have a long way to go before they'll adversely affect stocks. Again, this is based on the historical relationship between stocks and interest rates.

So, for now, the US stock market is the best overall market. So continue holding the stocks you have, which are mostly doing very well. If you want to buy new positions and increase your stock allocation, the following ETFs are among the strongest ETFs, and we recommend them for purchase:

  • SPDR KBW Bank (KBE)

  • Consumer Discretionary SPDR (XLY)

  • Merrill Lynch Retail HOLDRS (RTH)

  • iShares Dow Jones US Financial Service (IYG)

  • PowerShares Dynamic Leisure & Entertainment (PEJ)

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