The following is a brief, hopefully easy to understand, explanation of where we feel global markets presently stand.
- We have moved from Sector 4 to Sector 3, indicating slowing growth and rising inflation.
- We are taking a cautionary approach to global markets at this time.
- Why? Even though this earnings season has been good overall, when we look at the numbers from year to year, they aren't as good at this time. We will stay cautious until we see some extreme action from the Federal Reserve.
Market Trends: S&P 500 Update
- The markets hit record highs earlier this week.
- Volume has been declining. This may mean markets are "melting up."
- Earnings season has been good vs. expectations. However, year over year earnings have been declining.
- The Rate of Change (ROC) has broken its downward trend and made a move higher. This is good.
The global bond market is larger than the equity market. I keep an eye on this market because it is usually a leading indicator as to what is to come.
- The 10-year U.S. Treasury still hasn't broken its downward trend.
- Reminder - when yields go up, bond values go down. When yields go down, bond values go up.
- The world is still cautious about the global economy.
U.S. Dollar Trends
- The trend is down.
- U.S. goods have become more affordable for outside investments and the purchase of goods the U.S. exports.
- What does this mean?
- There are more U.S. dollars in the system. There is more supply than demand.
- The Federal Reserve has been injecting dollars into the REPO market to create liquidity where liquidity was lacking.
- Areas that benefit from the falling U.S. dollar
- Emerging markets
What Does This All Mean?
We believe, the U.S. is the best market to be in at the time being. The Federal Reserve lowered the Federal Funds Rate again at their last meeting in October. This means money is cheaper than before, making it more advantageous to borrow money, increase debt levels, and refinance debt at lower rates, than to pay off debt and increase cash holdings.
As long as there is cash in the system, liquidity and equity markets usually go higher. The bottom line? Always be invested. Watch markets that aren't the equity markets (e.g. bond markets, U.S. dollar) as being indicators as to what is possibly to come.
The following are two things you should consider doing as we enter the new year:
- If you haven't updated your estate plan recently, take some time to do that. Make sure they are still in line with your wishes.
- In the charitable mood? Consider gifting investments that have large capital gains in order to avoid the tax on the sale of them.
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