U.S. Markets, Japan, and Europe
U.S. markets continue ahead, logging one of their longest-ever periods without a 5% correction. We do not know what the catalyst for such a correction will be, and neither does anyone else, but there are plenty of potential culprits that everyone continues to watch, from geopolitics to the Fed to U.S. tax policy. In any event, as we have been observing throughout 2017, such a correction will be a buying opportunity, barring an unexpected deterioration in economic or financial fundamentals. Those fundamentals remain solid. U.S. growth is accelerating beyond the disappointing levels that characterized much of the post-recession period. Tight employment is encouraging businesses to make investments in plant and equipment, which will generate improved productivity growth in coming months. Business and consumer sentiment remain positive. Another earnings season has largely passed, with strong earnings growth for many businesses. In many ways, the current cycle seems to be hitting its stride. Some themes that have been highly cyclical in the past are taking on a more secular hue — for example, semiconductors, where lift-off for the internet of things, the cloud, and AI seems to be getting underway in earnest. Holders of U.S. stocks have a lot to cheer.
The Japanese market rallied strongly following the renewed mandate for Prime Minister Abe and the extraordinary monetary policy over which he has presided. The Nikkei then pulled back some 6%; we believe that domestic monetary policy, strong global demand for Japan’s exports, and international investors’ appetite for relatively cheap Japanese stocks will allow the rally to continue after this consolidation.
Although Europe is also participating in the improved landscape of global economic growth, its political troubles and its still-challenged banking system counsel us to look elsewhere for developed-world investment opportunities.
Emerging markets continue to be strong. Opinions differ about the beating heart of the emerging world — China. Some economists see trouble ahead as China continues to deleverage its financial system and deal with the problems created by the way local governments have funded themselves during the last two decades of booming growth. (We’ll discuss this topic next week.) Others see China successfully navigating this process, without a financial crisis that would tank Chinese GDP growth. In any event, right now, the Chinese internet companies we have favored during much of 2017 remain star performers, as global investors continue their enthusiasm for the unparalleled growth story represented by the Chinese middle-class consumer. Besides China, we like several other Asian manufacturing economies, particularly South Korea and Vietnam. We continue to believe that emerging markets may outperform the developed world over the remainder of the bull market.
But Watch the Dollar
The dollar, though, remains the potential fly in the ointment. We have been telling readers that the dollar is a key variable for more than a year. Should the dollar strengthen rapidly, it could spell trouble — especially for stocks in emerging market countries. Should the dollar break out of its current range, that will be a signal to us to reduce exposure to emerging-market stocks.
Gold and Bitcoin
Gold continues in its trading range; a move about $1300 would be necessary for us to get more bullish.
Bitcoin has rallied to new highs following the sharp decline that followed the recent abortive fork. The next clear psychological test will come when it approaches $10,000.
Thanks for listening; we welcome your calls and questions.