For several weeks, a rotation has been underway in the U.S. market, with money moving away from some of the year’s strongest performers -- many of them large, disruptive technology companies, says Monty Guild. Join Guild's Quarterly Forecast Sept. 26.
For a while, the rotation seemed to favor smaller technology companies in the cloud services and big data arena, and in retailing and consumer areas. Recently, speculative excitement has surrounded stocks in the nascent cannabis industry.
Whether or not one chooses to attempt to follow the rotation, we make one critical observation: the tone of the market is strong.
Animal spirits are present. Money is not “leaving the casino,” even if it moves from one table to another. Economic data continue to be strong in the U.S. Capital expenditures are rising, which is typically not an indicator that an expansion is about to end.
Businesses are optimistic, feeling that the tax and regulatory environments are supportive and becoming more so.
Although a rotation is underway, this rotation is towards the stocks of companies that show one characteristic that the market has sought for many, many months -- strong revenue growth prospects. The market is willing to pay a premium for this growth.
Money has flowed to the U.S. in part because of the strengthening U.S. dollar in 2018, although that strength has moderated in recent weeks.
Europe and other developed markets: hold off
For many reasons reiterated in recent letters, we are not enthusiastic about Europe as an investment destination. Where the U.S. is moderating and reducing its tax and regulatory burdens, Europe is increasing them.
Where the environment is becoming friendlier to business in the U.S., it is becoming more hostile in Europe. Where the U.S. has spent the post-crisis period reforming and recapitalizing its banking system, the European banking system remains troubled.
Politically, Europe has made little to no progress on the deep issues affecting it, notably the disconnect between a single monetary policy and a divided fiscal policy. This may come to a head again as Italy’s new populist government presses against EU budget restrictions.
And finally, Europe’s politics are showing stress again in many countries from issues surrounding the arrival and integration of millions of African and Middle Eastern migrants in recent years. In short, there may be a counter-trend rally in Europe -- but we doubt that it will be lasting.
Emerging Markets: not yet time for India
Although the news flow has been relentlessly negative for emerging markets, the collateral damage from the strong U.S. dollar has really been restricted to a few trouble spots such as Argentina and Turkey.
We like some emerging markets fundamentally, particularly India, where we see strong long-term growth prospects.
We don’t think it’s time yet, though -- we would wait to become more convinced that dollar strength has run its course, and we do not see the fundamentals in place for that.
Gold: bearish below $1185
Like all commodities, gold is affected by the direction of the U.S. dollar. While we regard gold as an excellent long-term component of a capital-preservation strategy, currently it remains in a trading range.
Technical analysts remain bearish if gold falls below $1185.
Cryptocurrencies: lobbying, SEC charges, bearish
Blockchain is moving to Washington.
A consortium of blockchain companies and crypto funds has established a trade association -- the Blockchain Association -- to lobby Congress for favorable legislation.
On the contrary front, the SEC formally charged two crypto outfits for operating as unregistered broker-dealers.
The bear market continues, but gradually, the regulatory environment is becoming clearer, and the technology is becoming integrated -- which may seem bad to crypto purists but is excellent for long-term thinkers.
Thanks for listening; we welcome your calls and questions.
Join the whole Guild team on Wednesday, September 26 at 10 am PDT for Guild’s Quarterly Forecast, our regular conference call and webinar on the most important trends affecting your portfolio, how we view the world, and where you can find the best investment opportunities.
In our presentation, we’ll cover:
• Economic and financial fundamentals that will keep driving outperformance for U.S. stocks;
• Why you should remain cautious on emerging markets, and where to look for bargains and trading opportunities;
• Why you should steer clear of Europe;
• What U.S. sectors and industries will enjoy the best prospects in the coming months;
• How you can detect the early warning signs of an oncoming recession and bear market. You can just listen in, or you can send in your questions for a personal response by Monty, Tony, Tim, and Rudi.