“Long term I expect the Fed and other central banks across the world to jump back into the game and get even more involved.“
It was a wild first half of the year.
Stocks were basically on fire, with the S&P 500 delivering an impressive 9.8% gain in spite of a recent pullback.
Gold took a serious beating, falling 23% in the second quarter alone, its worst performance since records began being kept in 1920 as the Fed signaled it may begin to taper its bond-buying program it has been using to keep interest rates low.
Bonds also had a rough quarter, with Treasuries suffering their worst performance in 25 years, also driven by news from the Fed.
A lot of industry leaders cashed in on the bullish movement in the S&P 500. Here are some of the year’s top performers.
- Buckeye Partners LP (BPL) +47%
- Celgene Corp. (CELG) +44%
- Biogen Idec (BIIB) +43%
- Intercontinental Exchange, Inc. (ICE) +43%
- Amerisource Bergen (ABC) +28%
- Kansas City Southern (KSU) +23%
- Google, Inc. (GOOG) +21%
- Visa, Inc. (V) +17%
- Stryker Corp (SYK) +16%
Looking Forward
There is a huge event happening in the market right now. And that is the Fed signaling that it may begin to reduce the size of its monthly bond purchases. This has been the Fed’s key strategy to support the economy for the last four years
So right now it looks like the Fed is in the very early stages of trying to remove itself from the market after four years of record involvement.
That presents a huge risk to the economy and the market.
Both will increasingly be asked to stand on their own.
The Fed itself admits that 40% of the gains in the stocks market in the laast four years have been driven by its QE prograns.
So here’s my take on how that’s going to unfold.
The market and economy are both going to show signs of weakness as the Fed moves toward reducing its involvement. Economists just downgraded global gdp growth projectionsn from 2.4% to 2.2% as China and Europe show major signs of weakness.
The Fed signaling any kind of exit does not support the market in any way. And the market is going to hate that.
But eventually, as the economy teeters on recession and markets fall lower, the central banks will once again be called on to save the world.
The options on the table are very simple. Either the entire global economy and market crashes or the central banks continue to print money and go for inflation.
Here’s what that means to our key asset classes.
Stocks: It could get rough out there if the market goes lower. But that is a buying opportunity. Once the central banks recommit to supporting the cause, I’m looking for stocks to rally hard into the end of the year. So be looking to buy into weakness this summer and fall.
Gold: I’m still bullish. Right now, the federal debt is $17 trillion. The CBO, the federal government’s own financial arm, just released a report last week that says in the next 30 years, the unfunded debt on social security and medicare is $43 trillion. So what that means is that the US is insolvent. And the only way out of insolvency is to print money. That’s why I’m bullish on gold. Gold is a trade on the dollar. Ya, gold’s been down for the last few months. Whoop de doo. Talk to me in ten years. 🙂
Bonds: This is easily the scariest trade on the Street. The secret nuclear bomb that investors don’t even understand. Most people who own bonds don’t even know what a bond is. Are these people prepared to calculate duration and interest rate risk and effectively re balance their bond holdings? Probably not. The quick and dirty on bonds is that in the long run they have very limited upside with substantial down side. I am in the process of trimming bond exposure and shifting that money into low-cost equity index funds. Beyond that, get in touch with an advisor about your bond holdings. It’s important to understand how they will fall in value as interest rates rise.
Macro: The US economy continues to show modest growth. That has the Fed trying to ween the market off its QE program that it has used to keep interest rates low. That is a big deal. It has been and will probably continue to cause volatility in the market. But long-term, as the global and domestic economies struggle with growth, I expect the Fed and other central banks across the world to jump back into the game and get even more involved.
That is good for both stocks and gold. It is bad for bonds.
Your Investment Partner,
Mike
