Brazil and India continue to be attractive. Brazil has shown that it can host the Olympics, begin to reorient its economy toward growth and stablize its political system as the impeachment of President Rousseff moves forward. Next week, we will write about some of the new goals that the Brazilians are setting to stimulate economic growth and employment, and how the implementation of these goals is progressing.
The U.S. market moves ahead slowly and steadily, and in spite of high valuations, there is complacency among investors. The candidates of both major U.S. political parties are setting forth their programs in many areas, including their economic, financial, and tax policies.
Among U.S. stocks we favor technology, both new and more mature companies, as well as growth companies that have been unrecognized by the market. Gold remains an area of focus, and we are noticing that demand for gold in the form of investment in coins and ETFs worldwide continues strong with India, the U.S., Southeast Asia, and Europe leading. Among official holdings, the governments of Russia, China, and Kazakhstan have all been buyers. Gold mining companies have recently risen much more than the actual metal making them vulnerable to correction. Such a correction would be bullish, and provide an opportunity to buy gold shares.
Silver continues to attract attention because silver wire and connections are used in many solar installations, and the number of solar installations worldwide is expanding as solar becomes more efficient for electricity generation. Solar still requires government subsidies to be economic, but the dollar amount of the subsidies per kilowatt hour is gradually diminishing. We are buyers of gold, silver, Brazilian bonds and stocks, and Indian stocks on dips. We will also use dips to buy major growth companies among the technology leaders of the U.S., Europe, and Asia.
The U.S. Dollar: Still the Key to World Markets
Source: Bloomberg
The movement of the U.S. dollar still holds the key to world markets.
The dollar rose rapidly between the middle of 2014 and the first quarter of 2015, and then moved sideways at a high level until December 2015… and the end of that rise corresponded with a long sideways period for the U.S. stock market. The trend in the dollar began to look sideways-to-down at the beginning of February, and after February’s dip, the U.S. stock market has recovered; with that sideways-to-down trend continuing since then, the S&P 500 has finally advanced to new highs.
Source: Bloomberg
Of course, there are many forces at work, but we believe that dollar strength (or weakness), at this juncture, is still the decisive one. Not just the level of dollar strength is decisive -- the trend and the trend’s rate of change are also key factors.
Every environment presents opportunities for investors. A rising dollar offers rising bonds as well as falling commodities and emerging-market stocks. A falling dollar offers rising commodities, foreign currencies, and U.S. growth stocks -- as well as bolstering the profits of U.S. multinationals.
Overall, the U.S. market performs well with a weaker dollar, but we are in a global macroeconomic environment characterized by sluggish growth in which many countries are weakening their currencies so that they can boost exports and repay their domestic debt in coin of lesser value. A strong downtrend in the dollar will be difficult to see under such conditions. But the sideways-to-lower dollar that has been the pattern since February will create some of the same opportunities.
We recommend investors put the dollar front and center in your dashboard of economic and political data to watch.
Investment implications: The strength or weakness of the U.S. dollar is still the decisive factor in gauging market conditions. The development of the sideways-to-weaker dollar trend since February has gone hand-in-hand with the breakout of the U.S. stock market to new highs. Besides the absolute level of the dollar relative to the currencies of economic peers, the trend and speed of its movement are also key factors to watch. Every environment presents opportunities -- but to identify them, it is critical to put the dollar in the middle of your dashboard.