Stocks continue to trade based on the possibility of further Federal reserve easing and a full blown QE3. When Bernanke hints at more easing, stocks soar and when he suggests the economy is strong enough to not need it, stocks sink. Of course it should be the other way around. I expect the economy to weaken in a few months as the effects of QE2 wear off and as QE3 slowly turns from fantasy to reality. Plus, this is an election year - and do not underestimate the power of an incumbent president seeking reelection.
Investors should prepare for a market peak later this year or early next year due to:
- Bull markets typically average 39 months, and we are in month 38
- The 4th year of a presidential cycle is typically strong
- QE3 will boost inflation too high for further easing, and after the election, there will be little political will to increase the deficit for more
A QE3 will push growth stocks up and investors can buy SPDR S & P 500 (SPY), SPDR Select Sector Fund - Financial (XLF), iShares MSCI Emerging Index Fund (EEM), Emerging Markets Consumer ETF (ECON), Brazil (EWZ), PowerShares QQQ Trust, Series 1 (QQQ), iShares Russell 2000 (IWM) and iShares FTSE China 25 Index Fund (FXI). Commodities will also go through the roof so buy Barrick Gold Corp (ABX), SPDR Gold Shares (GLD), Power Shares Double Gold (DGP), Market Vectors Gold Miners ETF (GDX), Newmont Mining Corp. (NEM), Goldcorp. (GG), Freeport-McMoRan Copper & Gold Inc. (FCX), PowerShares DB Gold Double Long ETN for the not so faint of heart, plus Silver Wheaton Corp. (SLW) and ProShares Ultra Silver (AGQ) and Fortuna Silver Mines (FSM). The gamblers out there won't be able to resist the likes of Apple (AAPL), Google (GOOG), Intel Corporation (INTC), Qualcomm (QCOM), Microsoft (MSFT), Cisco Systems (CSCO), Dell (DELL), Caterpillar (CAT), General Electric (GE) and Yahoo (YHOO), Red Hat Inc. (RHT), Schlumberger (SLB), VMware Inc. (VMW).
Home prices continue to edge downward slowly, even though the economy is as strong as it has been for years and mortgage rates have been at historic lows. Now that the robo-signing scandal is resolved, the massive backlog of 1.6 million potential foreclosures will accelerate again this year. This will keep home prices flat, to down, for years to come. If banks start to sense that holding back foreclosures is a losing game with no sign of a rise in home prices, they will rush to start dumping them onto the market, and the vicious cycle continues.
Starter homes will do the best as the echo-boomers, the baby boomers' kids, enter their initial home buying stage in large numbers around 2015. Mid and upper level homes will remain under pressure. It's a good time to buy a home to live in, but not for investment purposes.
An economy needs more spenders to grow. People spend the most in their 30's and 40's, with peak spending occurring around 48 years old. The populations of the entire developed world are aging fast, and by year end all baby boomers will be past 50. Add this demographic challenge to an already massively over-indebted population with no spending power, and we have a colossal headwind for our economy for several more years. That's why unemployment remains stubbornly high. We just don't need as much stuff produced as we used to.
Economic stimulus can mask it for a while, but eventually the government will be forced to stop borrowing to print new money and the weight of the debt service becomes too great for the economy to bear.
Managing money, especially your own, is a daunting task. There are plenty of ways to make money in this market and the dangerous market ahead, but the key is to do it without all the risk. Most certainly avoid Buy-and-hold ("buy-and-hope" - hope is not a strategy) and focus on an actively managed, tactical approach for your finances which takes advantage of what the market gives you and focusing on the sweet spot in the market which is income oriented investments such as corporate bonds, dividend stocks and preferreds. Of course, If your portfolio does not need the risk then don't take it and concentrate on investment vehicles with a guarantee of principle and income.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.