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Investing Questions Everyone Wants Answered

By John Persinos on May 28, 2018

Memorial Day unofficially kicks off summer, but the stock market so far this year hasn’t shown much “sizzle.” The S&P 500 and Dow Jones Industrial Average have generated scant gains year-to-date. Dizzying declines in February and March have rattled investors.

With the markets closed today, it’s an opportune time for me to address the three most common concerns conveyed to me via reader emails. I’ve distilled numerous emails into representative questions.

“Are we due for further steep declines in 2018?”

Triggers for additional market sell-offs abound. Valuations are still high. The stock market is pricier now than in 1929 and in 2007. Those years heralded protracted bear markets. Around the world, there are bubbles in stocks, bonds and housing.

Years of low interest rates that spawned these asset bubbles are coming to an end. The Federal Reserve is on course for shrinking the vast amount of government securities it holds. The European Central Bank and the Bank of Japan are following the Fed’s lead.

Two other tightening cycles, one from 1999 to 2000 and another from 2004 to 2007, were followed by stock market crashes. The Fed tries to strike a balance with monetary policy, but it rarely gets it just right.

There’s a danger that rising rates will choke off the economic expansion. At the same time, the Trump administration is gutting the regulations put in place to prevent another 2008. If trouble comes, Uncle Sam won’t have many tools at its disposal.

Also worrying are extremely high debt levels in overseas countries, notably China and beleaguered European Union countries such as Italy. A major overseas bank failure could start a “domino effect” and global contagion. The unfolding crisis in the strife-torn country of Venezuela looms large.

“Which sectors/geographies do you believe will perform the best this year?”

In addition to aerospace/defense, banking and health services are positioned to outperform in 2018. Financial stocks have racked up huge gains since Trump’s election, a rally driven by robust economic data and the expectation that the administration will deregulate Wall Street. This momentum should continue.

The GOP tax cut bill signed in December by President Trump cuts the corporate tax rate. That’s a windfall for banks, because they tend to take fewer deductions. Banks also are happy about the prospect of a laissez-faire businessman in the White House who’s intent on deregulating financial services.

High on the list: eliminating the Dodd–Frank act. Advocates of Dodd-Frank say it will prevent another 2008 crash. Banks say it ties their hands. Congress last week approved the first big Dodd-Frank rollback.

The Fed is tightening the monetary spigot, with three more rate hikes planned for 2018. The next rate increase is expected in June. The widening rate spread makes it easier for banks to make money on loans.

Health care will continue to benefit from unstoppable trends that are resilient to economic and financial cycles. People need medical care, especially as they get older and sicker, whether the economy is growing or not. Around the world, populations are aging and middle classes are rising. That spells long-term demand for doctors, hospitals and drugs.

“What major geopolitical event/circumstance do you expect to pose the greatest risk in 2018?”

The most likely source of risk is in Asia, specifically the Korean peninsula where the rogue totalitarian state of North Korea continues to rattle its saber. Further heightening the danger has been the aggressive response of the United States to North Korea’s provocations.

The summit between President Trump and North Korean dictator Kim Jong-Un, scheduled for June 12, was canceled on May 24 by Trump amid growing tensions between the two countries.

The White House’s extremely hawkish foreign policy stance will continue to prove a wild card around the globe in 2018.

The Middle East is another potential flashpoint, with possible disruptions of oil markets. Saudi Arabia’s economic restructuring could sow civil unrest. China is growing more assertive as Trump’s “America First” policy causes the U.S. to retreat from various international agreements, allowing China to rush into the leadership vacuum. This makes China’s neighbors in Asia increasingly nervous.

The brewing trade war, with tit-for-tat tariffs proposed by the U.S. and China, is a huge source of instability. A trade war benefits no one.

The upshot: 2018 will likely witness greater demand for aerospace/defense, especially for high-margin jet fighters that are popular export products. U.S.-based aerospace giants did well in 2017; this prosperity should continue in 2018. 

Paradoxically, heightened tensions in Asia could weigh on the technology companies that are based in fast-rising emerging markets such as Taiwan and South Korea. Caught in the crosshairs also will be Japan. The outbreak of outright war overseas would tank global markets.

Got any questions? Send me an email and I’ll answer them: mailbag@investingdaily.com

John Persinos is managing editor of Personal Finance and Radical Wealth Alliance, as well as chief investment strategist of Breakthrough Tech Profits.

 


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