As Stock Market Peaks, These are the Best Alternatives for Growth
The stock market’s epic rally may have run its course, according to Morgan Stanley. The bank has warned that U.S. equities have already peaked for the year, which means investors shouldn’t expect a return to record levels anytime soon. The return of volatility certainly corroborates their view. Rising interest rates and an escalating trade war also signal the possible end of the Trump reflation trade – at least, for now.
Although a massive correction hasn’t been priced into Morgan’s forecast, investors should be considering ways to diversify away from stocks if they haven’t done so already.
The End of the Meltup
After a blistering start to 2018, stocks have struggled to regain their glory since an early-February rout wiped $5.2 trillion from global markets. Although markets have recovered, volatility appears to be a mainstay for the first time in at least two years.
The CBOE VIX, Wall Street’s preferred measure of volatility, has traded between 15 and 20 over the past month. That’s right around the historical average. The VIX spiked by the most on record in early February, ending a multi-year stretch where it traded in the single and low double-digits – basically, around half the historic average.
Michael Wilson, chief U.S. equity strategist at Morgan Stanley, explains what this means:
“We think January was the top for sentiment, if not prices, for the year. With volatility moving higher we think it will be difficult for institutional clients to gross up to or beyond the January peaks,” he said in a weekly note on Monday, as reported by MarketWatch. “Retail sentiment indicators also look to have peaked in January and we do not see anything on the horizon to get retail investors more bullish than they were following a tax cut.”
For many, the end of the meltup isn’t a bad thing. Stocks have been richly valued for a long time, with much of the gains spurred on by hope of a Trump-inspired economic boom. Although the economy has performed better under the Trump administration, stock traders (i.e., the institutions) are now looking for more tangible evidence of a stronger recovery. Depending on who you ask, that might not materialize anytime soon.
Although Trump succeeded in lowering taxes, the cuts weren’t accompanied by an equal reduction in government spending. What they did do was spur on higher inflation expectations, which appears to be translating into actual price growth. In this environment, rising interest rates could spell trouble for indebted consumers who have already reduced their spending (as evidenced by the recent slump in retail sales).
What This Means for Investors
With U.S. stocks losing their luster, investors should already be considering ways to rebalance their portfolios. Given the current economic and political climate, the best vehicles for diversification are gold, cryptocurrencies and emerging markets.
The original safe haven is a natural bet in the current environment of rising interest rates and political instability. Although gold hasn’t made any news-shattering headlines recently, it has comfortably traded above $1,300 all year long. The signals we’ve gotten from the Federal Reserve is that interest rates will continue rising as inflation approaches and eventually crosses the 2% target. (Depending on which inflation measure you use, this has already happened.)
Interestingly, gold outperformed several major asset classes in 2017. As the following chart illustrates, silver is another commodity worth considering in the current economic climate.
Precious metals can be bought and stored outright or collected through various gold miner ETFs. With bullion trading well below record levels, the asset and its derivatives can still be had for cheap.
2018 has been a roller coaster for crypto investors, but those of use who’ve been in the market longer than 15 months know that volatility is nothing new. Recent price trends indicate there will be no V shaped rally, but that shouldn’t deter long-term investors (“hodlers”) from capitalizing on the cyclical downturn.
Market participants seem to agree that the vast majority of cryptocurrencies offer no long-term investment value (the phrase “shitcoins” is thrown around a lot to refer to these assets). But the cream of the crop certainly has a lot to offer. Bitcoin, Ethereum, Litecoin and Ripple seem to have the strongest fundamental indicators on their side. Stellar Lumens, bitcoin cash, OmiseGo and Zcash are also on the author’s watchlist of potential long-term gainers.
Although readers of Hacked don’t need a lot of convincing to buy more cryptocurrency, higher inflation could certainly make this asset class more attractive. As we mentioned above, higher inflation leads investors to consider other storehouses of value for protection. Bitcoin has been described by many as a storehouse of value that, despite volatility, is uncorrelated to other market developments.
Of course, there’s no guarantee bitcoin will rise because of inflation. We certainly aren’t speculating because of any historical precedent (inflation has been non-existent for much of bitcoin’s lifespan). But it’s certainly something to monitor given that bitcoin has behaved more like a commodity than a currency throughout its short history.
2017 was the year of the synchronized global recovery, but nowhere was this more apparent than in emerging markets. Emerging market funds outperformed Wall Street last year and are likely to do so again in the future.
If chasing growth is your strategy, then emerging markets are the first place to look. The International Monetary Fund (IMF) has forecasted emerging market growth of 4.9% this year and 5% in 2019. India is expected to top the list with a whopping GDP growth of 7.4% and 7.8% each year. Even Russia and Brazil – two countries hammered by the commodity downturn – are forecast to return to growth.
India’s economic potential has sent its small-cap stocks through the roof. In 2017, the Market Vectors India Small Cap ETF surged 65.4%. The iShares MSCI India Small Cap added 60.5%.
And say what you will about China’s economic slowdown, but its technology funds are soaring. The Guggenheim China Technology ETF returned 74% in 2017, while the KraneShares CSI China Internet ETF added 69.6%.
These are just some of the asset classes investors should be considering amid the latest downturn in developed market equities. Of course, this strategy depends largely on the path of inflation and corresponding monetary policy. The indicators we have now point to more robust price growth in the near future, which will require a gradual re-think of monetary policy in the Western hemisphere.
Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.
Featured image courtesy of Shutterstock.