Sometimes it's just better to be lucky, rather than good. That's where the U.S. is right now. With our markets reaching new highs, you would think we are in the middle of a raging economic boom with low unemployment, modest inflation, and people spending money like there's no tomorrow. However that is not the case, and couldn't be further from the truth. We're a mess, but luckily the rest of the world is even worse! Right now we are the least run-down house on an abandoned street.
There is simply no place else to go. Europe is in deep recession, China is slowing, the emerging markets are in a deep slump this year, so the good old US of A actually looks awfully good. With rates so low, stocks are the only game in town, even though our economy is slithering along at only 1-2% GDP growth and massive unemployment.
What's pushing stocks higher you ask? Federal stimulus. This market is absolutely addicted to the Fed's easy money policy. Ben Bernanke is holding key interest rates at zero, and buying $85 billion a month in treasuries and mortgage-backed securities. The Federal Reserve's balance sheet expanded to $3.217 trillion, and is now 20% of GDP, almost as much as the record high during the Great Depression. At this rate, the Fed holdings are estimated to grow to staggering $4 trillion, over 30% of GDP, by the end of 2014.
Of course they had to act to prevent a depression, but come on already! $4 trillion and a massive deficit to generate 2% GDP? Give me a break! However without continued stimulus, it would be downright ugly, but at best we are only delaying the inevitable. As I discuss in Facing Goliath - How to Triumph in the Dangerous Market Ahead, the Baby-Boom generation has peaked their spending, and a smaller generation follows them not only in the U.S., but in all developed countries. Demographic spending trends are down for another 6-8 years, and they won't turn up again until the Echo-boomers hit their spending stride. We just lived through the greatest debt bubble in human history and we will have to deleverage this debt at some point or we will never recover.
Although I paint a gloomy picture, the market is definitely trending higher. The endless U.S. and ECB stimulus, which is now being joined by Japan and China, will likely drive risk assets higher (and gold and commodities lower). This also helps our currency, and therefore our stock markets. Another positive is that the public is still not on board as a believer, sending the market climbing the proverbial wall of worry. When investor sentiment changes, or the Feds take away the punch bowl, I will look for a bunker. Keep on the lookout though, as some Fed governors are starting to publicly talk about winding down their asset purchases, admitting that they are having very little impact on the economy.
For now it's "risk on" and investors should buy high-quality growth stocks such as Apple (AAPL), which seems to be coming back and looking stronger every day, Google (GOOG), Intel Corporation (INTC), Qualcomm (QCOM), Microsoft (MSFT), Cisco Systems (CSCO), Yahoo (YHOO) and VMware Inc. (VMW). The funds with more diversification, and less individual company risk, are also the ones to buy (like the SPDR S&P 500 (SPY), PowerShares QQQ Trust Series 1 (QQQ), and iShares Russell 2000 (IWM)).
Commodities and metals specifically lagged for the last few months, but are still very attractive as QE and federal stimulus are not going away anytime soon. More aggressive investors can play this sector through Goldcorp Inc. (GG), Barrick Gold Corp. (ABX), SPDR Gold Shares (GLD), Power Shares Double Gold (DGP), Market Vectors Gold Miners ETF (GDX), Newmont Mining Corp. (NEM), Freeport-McMoRan Copper & Gold Inc. (FCX), plus Silver Wheaton Corp. (SLW), ProShares Ultra Silver (AGQ) and Fortuna Silver Mines (FSM).