The U.S.
After a somewhat volatile August, U.S. stocks remain in the trading range where they have been for the past several months, as trade worries converge with recession fears. After the much-watched inversion of the two- to ten-year U.S. Treasury yield curve, financial news was full of recession talk. We continue to point out that over the recessions of the last half century, yield curve inversion has preceded the market top by a median 18 months, with a median 21.1% gain in that time. Of course, these are median values; there has been a lot of variability. But the point remains that the 2/10 inversion is not an immediate call to “batten down the hatches.”
Until third-quarter earnings get underway, we will probably experience typical seasonal volatility. We believe that given the fundamental backdrop, investors should use such volatility to add to stocks at more attractive prices. We continue to favor a barbell approach emphasizing growth stocks with secular tailwinds on one side, and high-quality dividend-yielding stocks on the other.
Europe and Emerging Markets
High Brexit drama is already ensuing as the U.K. moves towards the current exit date of October 31. The drama is not highly relevant to investors. A no-deal Brexit, we believe, would provide a buying opportunity for the pound and possibly for UK stocks. But the outcome is highly uncertain; Paliamentary machinations are underway that would result in a further delay. A snap election is possible, which would present the possibility of a Labor government led by Jeremy Corbyn. That would certainly not be constructive for UK markets.
While the U.S./China conflict continues, emerging markets remain in limbo. There are many potential beneficiaries of an intensified manufacturing exodus from China, but the process of building up new supply chains would be prolonged and arduous.
As we noted above, we do see powerful incentives for both Chinese and U.S. negotiators to reach a deal, and in spite of the current apparent impasse, we remind investors that they should not discount the possibility of sudden and unexpected progress. The risks are not all skewed to the downside, though that can be hard to keep in view when the media drumbeat turns negative.
Gold
As we have written many times since last year, now is the time for investors to be giving strong consideration to their portfolio’s allocation to gold, gold mining shares, and silver. There are phases of the market cycle where a gold allocation is critical, and we continue to see signs that gold’s rally is responding to the first signs of a “change in the weather.” We believe that investors should use weakness to add to positions.
Thanks for listening; we welcome your calls and questions.
