Last week turned out to be a fantastic week in U.S. stocks as easing comments from the President of the European Central Bank, Mario Draghi, calmed financial market fears, as the Dow rallied almost 500 points in 3 days. Draghi pledged that the ECB would do everything it takes to save the Euro, and the market is pricing in co-ordinated central bank action between the United States and Europe. The later half of this week will be a widely watched one as the U.S. central bank, the Federal Reserve, meets on Wednesday, the ECB meets on Thursday, and the jobs report is released Friday. It is unquestionable that the central banks have a massive effect on financial markets in the short term. Most market participants, as am I, are expecting some sort of further easing from the Federal Reserve, whether it be through a further fed funds rate cut or through another QE. It is also widely supported in the financial marketplace that the ECB will announce further liquidity support, and potentially even a QE of its own. With that in mind, what are the best ways to play another easing environment?
Buy American Stocks
U.S. stocks (SPY) will continue to outperform other financial markets, especially risk assets. U.S. stocks price in the most effect of easing from central banks, as indicated by the most recent price swings from speculation on central bank actions. Since the United States continues the strongest developed region of the 3 major regions (United States, Europe, and Asia), capital will prefer to flow into U.S. stocks as opposed to other global equities. American companies also typically are much more stable as opposed to global companies, and due to the fact that economic risk is still present, global investors will prefer to allocate into stable, strong investments.
Specifically, the financial sector and gold sector should do well should the Federal Reserve and ECB provide further easing and potentially quantitative easing. I recently did a piece on gold miners here, that express a few potential picks in the gold sector. Another QE from the Fed should buoy gold companies, especially since they have been over-sold.
Most other risk-assets continue to impose great economic risks. Commodities such as oil (USO) and copper (JJC) are most affected by changes in the global economy, and these changes continue to be downwards, putting pressure on commodities. Investors will continue to be reluctant to put money into Europe and Asia-related entities, as signs of strength still have not presented themselves. Along with U.S. stocks, American corporate bonds (LQD) should also continue to out-perform, as investors still want some degree of safety.
Even if central banks fail to deliver more easing (although unlikely), as described above, U.S. stocks and corporate bonds should continue to out-perform due to the flight to a "safer" region. With low interest rates on treasuries, global investors are forced to seek yield and risk through U.S. stocks and corporates.
Purchasing U.S. stocks seems to be a win-win scenario in my eyes. U.S. stocks always have a central bank put in place, and with further easing expected, we should continue to see strength in U.S. equities. Even if easing does not come around, U.S. stocks should continue to out-perform other global risk markets, as the United States is simply the only large, liquid, developed region to put money into. Due to these reasons, purchasing U.S. equity and corporate debt seems to be the smart trade going forward.
Disclosure: I am currently slightly long equity through SPY, however my positions change frequently.