The investment environment continues to deteriorate despite the pickup in economic activity in the U.S. the last couple of years. As the Big Four Indicators I highlighted recently show, the U.S. economy continues to move in the right direction.
Despite the U.S. economy doing well, international economies are performing poorly with few catalysts outside of fiscal or monetary policy to drive them higher. Europe is in disarray and in a speech yesterday, China’s Premier Xi, signaled little trade flexibility.
In terms of Monetary Policy (central banks), we are in uncharted territory. On the one hand, market intervention potentially provides a mechanism to avoid financial contagion. On the other hand, it has added a lot of debt to the global economy and relies on globalization to keep the party going. The US and Europe are looking to reduce their exposure to globalization trends.
In terms of Fiscal Policy (government revenue/spending), deficit spending is projected for many years which is a concern after a 9-year economic recovery.
Constant increases in government debt, whether through monetary or fiscal policy, are likely to be a fixture of the 21st century economy. Investors should expect more market intervention going forward. My job is to manage the effects it has on investments and purchasing power. Right now, it is looking like global markets are bracing for another round of asset deflation.
The biggest telltale sign of concern about the potential for further asset deflation is not coming from stocks, it is coming from bonds. With the Fed now selling $50 billion dollars’ worth of bonds every month through Quantitative Tightening (the opposite of QE), analysts expected yields to go up and bond prices to fall. That is not happening. Money is moving to the safety of the 10-year Treasury bond. Money flows to 10-year Treasuries when it is concerned about asset deflation. 10-year Treasury bonds are again yielding less than 3%! Yields on the 10-year would be moving higher, and prices lower, if the bond market was expecting economic growth to continue.
Markets are signaling a high likelihood of ongoing asset price weakness. With each passing day more assets are breaking-down through price support levels. It is entirely possible all of 2017 gains will eventually be erased although stocks still hold on to most of them at this point.
For this reason, I believe it is a good time to be a bit more defensive and raise cash levels. Once the market settles down, available cash provides the ability to purchase growth investments at potentially lower prices. Even if you end up reinvesting at higher levels, that is a price worth paying if it provides peace of mind during a turbulent period in the global economy.
