Market Summary
The U.S.
Outside the view of most individual investors, a “quant quake” erupted as concentrated hedge-fund bets in momentum growth stocks were challenged by a sudden swing towards value stocks and cyclicals. The indexes were placid, but many observers wondered if this might presage an imminent end to the outperformance of growth stocks, which have dominated much of the bull market since the end of the Great Recession.
Our sense is that it is unlikely that this is a sea change. Given the dynamics of modern markets, in which short-term moves are increasingly driven by quantitative models and algorithmic trading, there is no knowing what really triggered the spasm.
We prefer to keep a calm view of the big picture. With the inversion of the two-to-ten-year Treasury yield curve, the “countdown” to recession has begun — with a market top that on average follows nearly two years after inversion, with an average gain for stocks of more than 21% in that time. The critical factor to watch is credit — and U.S. credit conditions remain strong. Therefore we are not concerned about imminent recession. When the time comes to get more defensive, we will, but we do not believe that time has arrived.
We continue to favor a barbell approach with growth stocks on one side, and strong dividend yielders on the other.
The Rest of the World
The U.S. remains the best neighborhood for investors. As we noted above, we do see strong incentives for both the U.S. and China to make a trade deal, but the timing is an open question; we would see a deal more likely as the U.S. presidential election gets closer. (Further pressure may fall on China depending on which candidate is selected to face off with Donald Trump, since some leading Democrats have even harsher rhetoric about China than the current administration.) When a deal seems to be in the offing, we will revisit emerging markets.
Our view of Europe remains the same: lacking in growth and any notable catalysts. Potential Brexit turmoil lies ahead at the end of October; ultimately, Brexit will be bad for Europe, as it will mean the departure of Europe’s most dynamic economy.
Gold and Bitcoin
For the short term and longer term, we remain bullish on gold for all the reasons discussed in our recent letters, and we would use weakness to add to gold positions.
While cryptocurrencies may benefit from some of the same trends that are bullish for gold, they are still highly speculative and have never been tested in a period of economic or financial dislocation. Crypto markets are not transparent, the construction of an adequate regulatory framework is slow, and institutional structures for holding them are only just beginning to appear. We do not think it would be wise at this juncture to consider cryptos as proxies for gold.
Thanks for listening; we welcome your calls and questions.
Please join us for our quarterly conference call at 10 AM PST on September 26, in which we’ll discuss strategies for income investing in a very low interest rate environment, as well as current events and trends and the ongoing bull case for gold.
