A Word from Jeff—more of the Same

     2016 continues to play out as we expected, with an extended bull market worldwide – but especially in the US – despite sputtering economies around the world, a less than red-hot US expansion, pricey US stocks, and deep anxiety about the spreading terrorist blight, the US election, and countless other concerns.

     Why? The countless trillions of surplus capital – the savings of billions of investors – must have a home, and with interest rates in low-to-negative territory and the prospects of a bond market crash increasingly clear, stocks are viewed as pretty much the only place to park this capital with any chance of a return. Right now US stocks – which we have been calling fairly-to-overvalued for a year or so – seem to be the most attractive home for investors here and offshore, but we believe this will gradually shift to non-US stocks as the differences in relative values sinks in. In a nutshell, non-US stocks are cheaper and have, we think, a higher (but bumpier) upside. This summer, US stocks have been very hot through late July, and we think this is a great time to reallocate portfolios to focus on more value (like our Columbia, Strong Stock, and Viking portfolios) and attractive non-US exposure (like in our AIMS™). As an example of opportunities elsewhere in the world, European stocks look quite cheap, with companies holding large cash hordes and stock prices beaten down from (we think) overblown fears of terrorism, Brexit, and economic torpor. While all these concerns are legitimate, they should not be confused with the fact that many Euro firms are coining money and can be had cheaply. S&P Euro 350 index dividends have risen more than the S&P’s since 2013, and now average 3.4%, 42% more than the 2.4% of the S&P. On the Euro Stoxx 50, dividends yield nearly twice the S&P’s. PE’s average 13 vs. the S&P’s 17, indicating stocks are 30% cheaper by this measure. And a strong dollar puts the wind at US investors’ backs, magnifying upside since more non-US shares can be snared per dollar laid down. Similar opportunities beckon outside of troubled Europe, and Camarda believes these countries will benefit from the next major stock bull market, as the tired and overvalued US markets yield the baton and enter correction or bear territory.

     On the US domestic front, we see the lukewarm economic expansion continuing and even gathering heat, regardless of who wins the White House. While recent growth numbers have been tepid, the read on employment is quite upbeat, with labor price pressure (at last) boosting incomes as the job market tightens and employers compete for workers. Notably, two major employers (Starbucks and JP Morgan Chase) voluntarily raised their minimum wage above government requirement in a bid to hang onto workers. Wage pressures feed inflation because they drive up the cost of goods and services, increasing retail prices. This, on top of the still-massive monetary stimulus (low interest rates and “easy money” policies) is probably enough to stoke the long-awaited inflation monster, and recent economic data seem to be indicating a resurgence. This is before the impact of any fiscal stimulus (government spending money on big projects like roads, bridges, utilities grids, and other infrastructure) which is widely expected based on the declarations of both presidential candidates, which could, in the vernacular of this year’s campaign, make inflation relatively yuge. Camarda is expecting inflation, and AIMS™ has been put on a footing we believe will take advantage of it. AIMS® income portfolios, as well as our Viking and Strong Stock programs, should help offer need income as prices go up. It was heartening to see that no less than Barrons noted (July 18 2016) that asset classes we selected for AIMS™ – floating rate notes, emerging market equities, and so on – are well-positioned to deliver attractive inflation adjusted returns. Once again, we are sounding the warning cannon on bonds, most of which are at great risk of big losses as interest rates go up.

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