Strong USD, Earnings Favor US Equities. Skip EM. Watch Gold, Cryptos

10/19/2018 3:13 pm EST

Focus: MARKETS

Monty Guild

Founder, Guild Investment Management

We continue to see a strong U.S. economic outlook. Every major economic indicator is strong. All of the variables that lead to a strong stock market remain strong. GDP growth leads to corporate profit growth, and corporate profit growth leads to higher stock prices.

Interest rates are rising slowly, and have not reached a level where they will slow economic growth in the U.S. Some argue that this is a long economic recovery, and thus it must end. It is a long economic recovery, but that in itself is not fatal. A recovery must have negative economic news arriving to end, and there is not yet any seriously negative economic news for the U.S.

Certain industries are doing better than others, and that is a function of their ability to withstand events around the world. The strong U.S. dollar (DXY) is helping some industries and hurting some; the tariffs are helping some industries and hurting others. The overall impact on the U.S. economy is minimal and varies by industry.

The current correction in U.S. stock prices is due to a rapid run up in prices that leads to a market correction. Market corrections are always unpleasant and lead to fear and volatility. However, the current correction has not created any change in the underlying economic outlook in the U.S. 

There have been more than two dozen of this type of correction over the last decade, and all have been followed by a market rebound.

We remain bullish on U.S. stocks and bearish on longer-term bonds. We believe that the same leading industries will reassert themselves as this market correction ends.

Our favorites are disruptive technology including internet and cloud technologies, software that allows the integration of many platforms and that increases corporate efficiency, cybersecurity, travel, specialty retail, entertainment, healthcare, and financial technology. Precious metals are responding to greater world tension with a modest rally.

Global economics and global markets

The global economy remains strong but has lost a bit of growth and is growing at an annual rate of about 3.7%. This strong but below recent trends.

On a global basis, there are cross-currents as well. China has seen a decrease in their real economic growth due to several issues discussed above. Europe has serious political problems for old leaders with new, more nationalistic and less Eurocentric leaders coming into power in several parts of Europe.

We are bearish on Europe because of issues around Brexit and Italian debt. We are not bullish on emerging markets because of the China weakness; although some emerging markets could be trades for the nimble, we are not willing to endorse them for investment.

Gold

Gold has been able to put on a small rally as a result of all of the volatility in stocks in the U.S. and the world, and with all of the fears about Brexit, China and interest rates. Longer-term we will watch gold closely, because inflation is rising modestly, especially in those countries that are experiencing lower currencies.

Many emerging countries have seen their currencies fall versus the U.S. dollar, and this has created an inflation pressure in their nations. U.S. inflation seems somewhat controlled at the present time. It may tick up slowly. If inflation picks up in the emerging world, they may demand more gold and create a rally.

Cryptos

Cryptocurrencies continue to show progress in solutions for institutional investors; the latest is the launch of Fidelity Digital Asset Services.

Crypto speculators should watch such news closely -- and keep their finger on the pulse of developments surrounding potential ETFs.

Guild recently taught a Master Class on cryptos and digital assets at the Dallas MoneyShow; if you are interested in seeing the slide deck from this class, please send us an email.

View Monty Guild’s presentation, Global Stock Market Outlook 2018-2019 here.
Recorded: MoneyShow Dallas, Oct. 5, 2018.
Duration: 10:17.

Subscribe to Guild Management here.

Related Articles on MARKETS