If you’re looking for quick answers to tough investment questions, such as what you can expect from the stock market for the rest of the year, or the impact Trump’s tweets have on the market, you’ve come to the right place. CLS Investments President and CIO Rusty Vanneman answers ten of the top advisory questions he has received recently.
Q: What do we expect from the stock market for the rest of 2019?
A: We don’t think the last half of the year can cause major changes to long-term investment portfolios, but we expect two things:
First, we expect more price volatility, meaning that prices will move frequently, both up and down. This volatility, typical of the market, is likely to provide investment opportunities.
Second, we expect the stock market to generate even more earnings than this year’s earnings already above average. The market tends to rise, especially during the third year of a presidential cycle. In addition, the last three months of the year are generally the strongest.
Q: What do we expect from the bond market for the rest of 2019?
A: We expect interest rates to rise. This year we have seen a noticeable drop in yields; growth data has fallen, but the bond market movement seems an overreaction, especially given that some inflation data has risen steadily.
Q: Are we nervous about a recession?
A: It’s important to keep in mind that it usually takes three to six months to determine if the economy is in recession. Whenever you see a chart that matches recessions with market behavior, keep in mind that the recession was identified long after the fact and not in real time.
That said, since 1980, one indicator has had three previous successes in crisis. The indicator is an inverted yield curve, which occurs when the interest rates on long-term bonds are lower than the yields on short-term bonds. This is atypical of the bond market and suggests lower economic growth. The yield curve reversed in May and we are watching closely.
P: What will the Federal Reserve do next with short-term interest rates?
A: The market expects the Federal Reserve to cut rates – and it probably will, but in my opinion it’s not such a clandestine decision. The economy is not so bad; there are some incipient inflationary pressures and interest rates are already low.
Q: What do you think of the European economic situation?
A: Europe is still a disaster. The European crisis of a few years ago has not really disappeared; market narratives have simply moved elsewhere. Because we are global investors in CLS, we have exposure in Europe to our portfolios, but we have a lower weight than the global market. However, despite the problems, there are values that need to be taken advantage of. And if prices plummet even further, we may buy more.
Q: How do you want business discussions to be resolved?
A: Like most market participants, I expect market volatility to increase as a result of public rhetoric. But I also think there is a possibility (between 10 and 20%) of a very positive conclusion.
Q: What do you think of the impact of Twitter?
A: Thanks to President Trump, Oval Office tweets have become a real business. However, the impact of presidential tweets is a short-term game and there is no need for long-term investors to monitor them or make changes to their portfolios accordingly. For long-term investors, it’s noise.
P: What is the future of Bitcoin and other cryptocurrencies?
A: Bitcoin has had an amazing career this year. At CLS, we are excited to create cryptocurrency ETFs. We see it as an incipient asset class segment: used in the right sizing, such as very small weights given the accompanying volatility, it could be a useful tool for managing the overall risk of the portfolio.
Q: Will the dollar recover?
A: The US dollar has performed well, but prices have broken down recently, even dropping from the key 200-day moving average. This would suggest that the dollar will continue to be weaker as currencies tend to move in the same direction. In addition, if the Federal Reserve lowers short-term interest rates, the currency will be put under more pressure.
If the rest is the same, a weaker dollar would mean a strong relative return for international stocks and real assets, such as commodities.
Q: What is your best investment idea?
A: Emerging market value stocks! They remain our highest conviction. It is the only segment of the asset class that appears to offer above-average profitability expectations relative to long-term averages over the next five to ten years. Emerging market value stocks offer essentially the same growth as the S&P 500, but their valuations are 50% to 67% lower.
For more information on CLS Investments, contact us at 888-455-4244.
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