What My Gut Is Telling Me Right Now About the Stock Market
Wednesday, March 7th, 2012
By Mitchell Clark, B.Comm. for Profit Confidential
The single greatest threat to your investment portfolio isn’t a Greek debt default (although that’s a big one). The major threat is geopolitical and it has to do with the potential for war with Iranand, to a lesser extent, Syria. Investment risk in the stock market remains very high at this time. I repeat my earlier view that a conservative investment stance is warranted.
Of course, because the stock market has run so strong since the beginning of the year, it is due for a consolidation/correction. Reasonable equity valuations and help from the Federal Reserve have helped stock prices tremendously. If war breaks out in theMiddle East, you can bet that the Federal Reserve will print even more money.
I’m actually a little surprised by the spot price action in gold, but gold’s weakness is mostly due to weakness in the euro currency, which is boosting the U.S. dollar. When the U.S. dollar strengthens, the price of gold tends to suffer. There has been a geopolitical risk premium in the spot price of oil, but so far, not really in gold. As I wrote previously, gold is worth buying, $1,600 or below. It should be a hedge position in a portfolio already.
I just can’t say enough about the amount of investment risk that’s growing in capital markets today. It is an election year and that tends to be a positive for the stock market. But, all the structural problems in mature economies remain and economic growth in BRIC countries is slowing. Add in geopolitical problems and we have the makings of a real mess. I think stock market investors need to be extremely cautious going forward this year. I hope everything works out fine, but my “gut” is really talking to me.
Anyway, gold is worth keeping an eye on here, especially if you don’t have any exposure. As a practical investment strategy, gold and silver should be in a well-balanced portfolio, even if just for the hedge against inflation. Gold mining stocks have been trending lower lately, following the price action in the spot market. Even though we’ve had a very good start this year, it’s a tough stock market in which to be a speculator. There is no real trend. Uncertainty about the near-term future remains very high.
My outlook isn’t gloomy; it just reflects the landscape we have to deal with. We’ve seen some improvement in U.S.economic news, stock market valuations are fair, and the outlook for corporate earnings is low double digits. (See The Strategy for Capital Gains That’s Proven to Work.) Technology stocks have been strong (always required for a rising market) and so have retailers (meaning consumers are spending). But this doesn’t mean that the stock market won’t go down big-time if there’s a shock like a sovereign debt default or threat of war. It’s a pickle. If we didn’t have problems with Iran and we didn’t have to worry about the euro, the stock market would be a lot higher.
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