Markets “In a Nutshell” for December 4, 2018

Investment Week at a Glance

Stocks enjoyed a big up week as the Dow Jones Industrial average gained 5.1% while the S&P 500 was up 4.9%. The New York Stock Exchange Composite (2,000 stocks) rose 3.5%. The “average investor’s index” (Value Line index) gained 2.8%. Foreign stocks (DJ Global ex U.S.) were up 1.3%. Bond yields dropped (bond prices up) as the 10 year Treasury ended at 3.01%. (Data sources: Barron’s Financial, Wall Street Journal)

Foreign stocks reach record bargain levels relative to U.S. stocks

It has been a tough time for foreign stock investors the past few years. Over the past 5 years (through 11/30), U.S. stocks have gained about 10% a year while foreign stocks have gained a mere 2% a year. And as a chart from Leuthold Group shows, the price to earnings ratio (“p/e” which measures how expensive or inexpensive stocks are) of foreign stocks relative to U.S. stocks have reached the lowest level in the chart’s 44 year history, meaning  foreign stocks have become bargains. As such we have started to increase our foreign stock positions in anticipation of foreign stock outperformance during the next cycle.

U.S. debt to slow down the economy?

Bond king Jeffrey Gundlach (founder of the $120 billion Doubleline Asset Management) worries that the big annual deficits the U.S. government is running ($ trillion a year) is going to cause problems in the next 5 years. According to Gundlach, rising interest rates will mean higher government interest costs and lower economic growth in the next 5 years. Gundlach remarks that there is $7 trillion of debt (Treasury Bonds) paying 2% coming due in the next 5 years. To rollover that debt, the U.S. government would need to pay 3% interest, adding $150 billion a year to government interest costs. This will mean a tough discussion on cutting entitlements or raising taxes both which would likely lower GDP growth.

What’s the biggest mistake investors make?

Hedge Fund maven Ray Dalio says the biggest mistake investors make is not paying attention to market cycles. “People have to understand that bubbles occur and are followed by busts,” says Dalio. His advice is to go counter-cyclical (as in “buy low and sell high”).

Quiz:

According to the Congressional Budget Office, what will be the interest cost on the U.S. government debt for the fiscal year ended 9/30/19? a. $390 billion b. $39 billion c. $1 trillion d. $177 billion…Answer is below…

 

Have a good week!

 

Answer to quiz:

a. $390 billion