Buying the dips still works

After several days of mild selling, buyers appeared, as they have all year. The ‘buy the dip” mentality is still alive and well. It is why you should stay invested. At least that’s the advice I’m getting here at the Schwab Impact conference in Chicago. There is nary a bear to be found among the several thousand investment advisors attending investment seminars for three days. Liz Anne Sonders, Schwab’s Chief Investment strategist, believes we are at the latter stage of the economic cycle, but that expansion is still not at its peak. Capital spending on fixed investment and productivity appears to be growing. While investment sentiment is extremely positive (a bearish, contrarian indicator), as measured by Ned Davis Research, it is only one variable in determining where the markets are going. Right now, valuation metrics are all over the place: from stocks are very expensive, to fairly valued, to cheap, when compared to interest rates. Her sentiments were echoed by Jeff Kleintop, Schwab’s global strategist. He believes foreign investments will continue to outperform U.S. equities as they have all year. Emerging markets, he believes, will do even better than developed overseas markets. He points to the fact that every one of the world’s 45 largest economies is growing this year, something that has not happened in a decade or more. Diversification, (as opposed to putting all your eggs into a U.S. basket) is finally working after years of foreign markets languishing in the shadows of an American recovery. Correlation between markets, says Kleintop, is at its lowest in 20 years. One variable they both look at (as do most...

China chips away at U.S. dominance

We are about half way through President Trump’s twelve day visit to Asia. The main event, another meeting between Trump and President Xi Jinping, underscores the importance of how both nations view China-U.S. relations. There is a high probability that China will gain as much as the U.S. in these talks. So far, it has been a year of “wins” for China. And much of these winnings are a result of Donald Trump’s “America First” policies. Trump’s proposed cuts to the United Nations, to foreign aid, to the rejection of the climate control accord, his withdrawal (both real and threatened) to various trade deals like NAFTA and the Trans-Pacific Partnership (TPP) a 12-nation trade deal that had excluded China, have all left an economic and political vacuum. As the U.S. turns inward, China is stepping in to replace the U.S. wherever possible. This year a 300-mile railway in Africa will hopefully revive trade and tourism. The rail line opens between the Kenyan capital of Nairobi and Mombasa, one of East Africa’s largest ports. The $13.8 billion project was financed by the Export-Import Bank of China. It is only one of a series of direct Chinese foreign investments worth over $200 billion. While we threaten to abandon our two largest trading partners (Mexico and Canada) unless the North American Free Trade Agreement (NAFTA) is renegotiated, China is busily rebuilding an ancient East-West trade route from the days of Marco Polo. Begun in 2014, with a $40 billion investment, a spider web of railways, ports and roads linking all the trading centers and key cities between London and Beijing is spreading...

Cracks in the House of Saud

Over the weekend, the government of Saudi Arabia announced multiple arrests of royal family members as well as other governmental officials. The official explanation was a new campaign to root out corruption, but many believe the raid was a power grab by the reigning Crown Prince Mohammed bin Salman. Corruption in Saudi Arabia is as common as sand. It is what makes the wheels run so global observers discounted that excuse. The assumptions ranged from a thwarted coup against the reigning family to a consolidation of power orchestrated by the heir apparent. As a result, gold jumped over $10/ounce, oil spiked 3% and investors held their breath expecting another shoe might fall in the days ahead. Police arrested 49 people, 11 princes, four ministers and dozens of former ministers in the pre-dawn hours of Sunday. There was a fatal shootout between police and one now-dead, Saudi prince, while a mysterious helicopter crash killed several other ministers and a high-ranking member of the royal house. As the smoke clears, it appears that the 32-year-old crown prince, Mohammed bin Salman, is cleaning house, consolidating power, and eliminating any real or imagined rivals within the country. One of those arrested, billionaire Alwaleed Bin Talal, is a well-known global investor with large holdings in American companies. King Salman elevated Prince Mohammed to heir apparent over other, more senior, princes in the royal line of succession, less than three years ago. That didn’t sit well among numerous cliques or factions within and outside of the family. The grumbling grew louder when the young prince announced his “Vision 2030.” A far-reaching economic policy which is...

Investors underwhelmed by tax reform

With great fanfare, House Republicans rolled out a tax reform proposal that they promised would get this country going again and invigorate business, while creating jobs and huge savings for the middle class. What are they smoking? Clearly, the entire reform package was simply a smoke screen to reduce taxes for American corporations with the majority of benefits directed at the country’s largest companies. For the individual, depending on what you make and where you live, taxes will remain the same or go up. Several legislators used a postcard as a prop claiming your individual tax return will be so simple it will fit on a postcard. The reason is simple. This plan will greatly reduce the few tax deductions we have left. State and local taxes will no longer be deductible, property taxes will be capped and a slew of other credits and deductions have been reduced or eliminated. In my opinion what we have here is a classic distribution of wealth from the individual to the corporation. You may have noticed that while the GOP cut taxes on corporations permanently (from 35% to 20%); they did nothing to reduce or eliminate the mountains of tax credits, incentives and loopholes available to big business.  If the truth be told, the effective tax rate of U.S. corporations, after taking advantage of these loopholes, is 12.6%.  And that was before this proposed tax cut. It doesn’t take rocket science to figure out that if the Republican proposal passes, U.S. corporations could be effectively paying no taxes at all. The government may actually be paying them thanks to the various tax...

Are you ready for a down market?

It has been some time since we have had even a tiny decline in the stock market. Human behavior is such that we expect what has come before to continue into the future. When it doesn’t, a whole host of emotions arise and most of them will be detrimental to your financial health. A new survey by E-trade Financial, a discount broker dealer, reveals that well-heeled investors (those with $1 million or more in equity investments) are as bullish as they have been all year. Almost 75% of million dollar players are now bullish as we enter this final quarter of the year. Most of these investors are 55 or older and are significantly more optimistic than younger investors. Some of that bullishness is understandable given the fundamentals of the economy. Gross domestic product continues to grow slowly and some estimates (such as the most recent survey from the Atlanta Fed) indicate that we could see a greater than 4% growth rate in the fourth quarter. Couple that with a fairly consistent improvement in corporate earnings and we have an almost Goldilocks environment for stocks. This is especially telling since many of the upside earnings surprises are coming from cyclical companies, which really do measure the pulse of the overall economy. The same sort of economic results can be found overseas to a varying degree, which works to improve the outlook for the world’s economy in general. The fact that we are entering the historically best period for the stock market all year has also fueled bullish sentiment. This rosy scenario has resulted in fewer and fewer investors (only...