Market Summary
The U.S.
The U.S. stock markets advanced rapidly in June, finally rising to new all-time highs. With the S&P 500 at the top of its trend channel, and several technical signals suggesting that it is overbought, a near-term correction would be normal. In our more active strategies, we will use this weakness to add exposure to our favored areas for our clients — primarily large-cap U.S. growth stocks in industries with long-term tailwinds, such as artificial intelligence, data analytics, the cloud, cybersecurity, networking, defense electronics, and financial technology. For our dividend-focused clients, we continue to seek companies with substantial and sustainable dividends and strong track records of dividend growth and will use pullbacks as opportunities.
Mexico
Since the election of Andrés Manuel López Obrador (AMLO) to Mexico’s presidency last year, we’ve been hopeful that he would be a more pragmatic leader than some of his past might suggest. Unfortunately those hopes are becoming increasingly dim. On July 9, his finance minister, Carlos Manuel Urzúa Macías, resigned, and released a stinging criticism of the Mexican administration, stating that his ministry had been forced to employ unqualified people, and that his efforts to steer an evidence-based policy “free from all extremism of the left or of the right” had been thwarted. His specific policy disagreements with AMLO were not described, but they almost certainly involve disputes about how to handle needed reforms to the state oil company, Pemex. His departure casts a darkening cloud over Mexico’s prospects in the eyes of many international investors — including us. We have seen Latin American countries go down the populist road many times, and the final outcome is never good for investors or for citizens. Our caution on Mexico is now high.
Europe and Emerging Markets
As we’ve noted in recent letters, we see the most favorable opportunities in the United States. Europe remains mired in political strife and entrenched low-growth policy and political culture. Emerging markets have participated in the global stock market rally in 2019, but are more exposed to trade-related volatility and economic trouble than the U.S. Potential exceptions are Brazil and India; in both countries, administrations are at work to undo the effects of many decades of poor policy, corruption, and excessive state intervention in the economy. India is further along this path; Brazil is just getting started under President Jair Bolsonaro, and although he has made strong progress, we emphasize that the problems he is addressing are deep and enduring.
Gold and Cryptocurrencies
For reasons mentioned in several recent letters, we continue to like gold; we believe that inflation may begin to accelerate, technical signs are positive, and many central banks are buying.
Cryptocurrencies gave a typical shellacking to overzealous speculators, as bitcoin retreated rapidly from recent highs under pressure from high-profile government attention to Facebook’s [NASDAQ: FB] Libra digital currency initiative. Bitcoin has continued to take share from alt-coins, and now again accounts for 65% of the global digital currency market cap. Among decentralized digital currencies, bitcoin may continue to demonstrate that network effects are king here as in other areas of tech. Increasingly, we believe the trajectory of digital assets will be towards stablecoins linked to fiat currencies, and digital currencies established by central governments. A case can be made for decentralized currencies in this context, but one that will be increasingly hemmed in by governments intent on restricting such currencies’ intersection with the official financial system. To speculators, our advice is, be cautious, and stay with regulated U.S.-based exchanges.
Thanks for listening; we welcome your calls and questions.
