The U.S.
As earnings season progresses, most companies are beating estimates, and sequentially, earnings are coming in on average slightly up. So far, earnings support our view that the U.S. economy is bottoming and preparing to exit the third slowdown of the post-2009 expansion. We note that the U.S. seems to have averted an outright “earnings recession” like the one experienced in 2015 and the first half of 2016.
There will be one further quarter of tough comparisons as we lap the effects of the 2017 tax cut. Then, assuming that external factors have not intervened, we anticipate an acceleration in earnings, modest P/E expansion for the U.S. market as a whole, and consequently, a continuation of the basically bullish outlook for U.S. stocks that has obtained since the 2009 recession. In short, even though the much-watched 2/10-year Treasury yield curve inverted, we believe that investors would be ill-served by a too-cautious view at this juncture. We continue to favor a portfolio allocation that emphasizes both strong dividend yielders, for which we believe there will be ongoing demand in a low-rate environment, and stocks with strong growth characteristics, particularly in thematically favorable technology industries and sub-industries.
The U.K. and Europe
The U.K. is attractive to us. We believe the likelihood is high that, deal or no deal, the U.K. will prosper in genuine independence from the European Union. Many U.K. stocks have attractive dividend yields at current price levels. We also believe the pound could appreciate further as Brexit happens in whatever form, and goes into the rear-view mirror.
If Europe takes a turn towards deeper fiscal integration after the U.K.’s departure, the resultant growth bump could provide a tactical trading opportunity. Still, we would not be long-term bulls on Europe. The writing on the wall is that deepened European integration will be focused on heavy-handed statist interventions rather than the red-tape cutting encouragement of entrepreneurship and initiative that would be the best “tough medicine” the EU could take. This does not mean that Europe will be a miserable place to live — it just means that investors looking for growth will likely be best-served by looking elsewhere.
Gold
The behavior of the dollar is making it tough for gold to make much progress. We continue to believe that this is a good juncture for investors to review their gold allocation, and continue to see medium to long-term potential for gold. While recession and financial and monetary turmoil do not appear to be imminent, many astute observers — including some who are directing central banks around the world to buy gold — see the first signs of clouds on the horizons. Remember that gold is a potent defense — but while the sun is shining, stocks will still be your best way to profits.
Thanks for listening; we welcome your calls and questions.
