U.S. and Global Stocks
Are we in a melt-up? We are beginning to see speculative market participants bidding up the stocks of many companies which had been left for dead — if they’re in the sectors and industries of the moment. Many companies associated with carbon-free electricity generation or the electrification of the economy have seen their stocks rally, even if in their history they have been egregious destroyers of investors’ capital. Of course many of these companies are purveyors of new, transformative technologies — but in the general stampede, it is obvious that many investors have become less rigorous about their evaluation of company fundamentals. We’re all for solutions to big and pressing problems, but there is usually less pain for investors when they make sure that the companies in which they invest have a careful eye on both the high road and the bottom line. There are plenty of such companies to be found by investors who want to make sure that their money is at work supporting the values they want to see in the world.
In general, though, in spite of signs of froth in some currently fashionable market areas, the U.S. stock market, while high by several measures, is not irrationally high when the larger economic and financial context is taken into account. In case you haven’t tired of hearing us say it week after week, that context is fundamentally shaped by supportive central banks, historically low interest rates and inflation, and congenial credit conditions for U.S. corporates.
While all those remain in place, we believe, U.S. stocks can continue to rally, although we believe there are many potential sources of volatility ahead in 2020 — not least a contentious Presidential election that only promises to become more contentious as the year progresses. The recent coronavirus outbreak in China has turned out not to be the global “black swan” event that some investors feared, though it will prove to have done real economic damage to China in the first quarter, and may have longer-term consequences in hastening the “de-Sinicization” of some supply chains. Still, the novel virus is a reminder that disruptive events can appear out of the blue to interrupt a market’s ebullience. While our fundamental thesis is in place, volatility will mean opportunity.
We remain most interested in the U.S. stock market, although we do see some longer-term opportunities elsewhere (such as the post-Brexit U.K., which will certainly experience ebbs and flows as the process of cementing its independence from Brussels continues to play out). Within the U.S. market, we remain focused on the “usual suspects” — the high-growth tech and software related names we have long favored, some payment processors and software providers, selected medical and biotech names, as well as select strong dividend yielders. We believe this “barbell” will benefit from investors’ desire for both growth, and safe current yield.
Gold
In spite of a strong dollar, gold has remained strong. To us, this is a sign that many market participants — from central banks down to retail investors — are beginning to accumulate gold ahead of potential disruptions that may occur when the long economic expansion has run its course. That doesn’t mean recession is imminent — just that many are seeing it drawing closer. Since last year, we have anticipated modest but solid appreciation for gold in 2020 — and this remains our view.
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