Markets “In a Nutshell” for May 14, 2019

Investment Week at a Glance

Stocks dropped last week. The Dow Jones Industrial average fell 2.1% while the S&P 500 was also down 2.1%. The New York Stock Exchange Composite (2,000 stocks) lost 1.9%. The “average investor’s index” (Value Line index) declined 2.3%. Foreign stocks (DJ Global ex U.S.) fell 3.5%. Bond yields dropped (bond prices up) as the 10 year Treasury ended at 2.45%. (Data sources: Barron’s Financial, Wall Street Journal)

U.S. stocks reach highest level ever vs. foreign stocks

According to Bloomberg, U.S stocks (the S&P 500) have reached a record level relative to foreign stocks (the MSCI EAFE index). The S&P 500/MSCI EAFE ratio has reached nearly 1.6 times, the highest level since the ratio was first calculated in 1970. All that to mean that perhaps in the next market cycle we may see foreign stocks outperform as the ratio falls back to a more neutral level of 1.0. So now may be the time to start investing in foreign stocks in Europe and Asia.

Modern Monetary Theory coming in the couple years?

As we mentioned in our early 2019 seminars, there is a new economic theory gaining traction in not only colleges and universities but also Congress. Modern Monetary Theory (MMT) holds that a country can print massive amounts of money in its own currency as long as inflation and interest rates stay low. In the U.S. proponents of MMT propose the new $trillions be used to pay for national health, forgive student debt, and guarantee jobs for all workers. Of course giving Congress almost unlimited funds would be a desirable thing for politicians. Not all like MMT. Detractors fear runaway inflation and soaring interest rates as more money supply pushes prices of goods and services upward.

Buffet says stocks are “ridiculously cheap” if rates stay low

Billionaire investor Warren Buffet, in a CNBC interview, said that if the 30 year Treasury Bond yield would stay at 3% levels, stocks look “ridiculously cheap.” However, Mr. Buffet doubts that rates can stay low indefinitely given the exploding budget deficit (the U.S. government is spending $1 trillion more than it takes in on an annual basis). Although, as the preceding paragraph explains, Modern Monetary Theorists believe the economic situation the past 10 years (low rates, low inflation, large deficits) can persist.

Quiz:

At last check, the U.S. national debt is $22 trillion. What is the value of the U.S. economy as of the last 12 months?

a. $600 billion

b. $6 trillion

c. $16 trillion

d. $21 trillion

Answer is below…

 

Have a good week!

 

Answer to quiz:

d. $21 trillion