Optimism Reigns in the U.S.

U.S. Unemployment Rates Spur Rate Rise - By Dan Good

Stocks Become Only Game in Town
I remember back in 1987 when interest rates were rising and investors were plowing into stocks. This happened since when bond yields rise long term bond prices go down to match the higher current bonds. Who wants a bond yielding 3% when a new issue is at 3.5%? So bonds become less attractive and no one wants them. Rising stocks then become even more attractive and as John Templeton used to say their rise begets more gains as investors clamor into stocks not wanting to miss out on forever rising prices. But this “game” has an inflection point. Eventually the rate on bonds becomes more of a deciding factor than the direction of interest rates. With U.S. 10 year treasuries the highest they have been since 2011 I think we are near or at this point. As for signs of speculation just the rumor of Coke putting cannabis in their drinks today has led to massive gains in marijuana stocks. This is not normal investing behavior.​

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Templeton’s Play in 1973
The Templeton Growth Fund, which started in 1954 became one of the best performing mutual funds in the world by investing internationally prior to the U.S. market collapse of 1973-1974. His fund held positions in primarily Japanese securities as they offered better value at the time. Again we may be near this point as well as the momentum of the U.S. markets get trumped by the better valuation of stocks internationally. Momentum will eventually die out but anyone trying to time this is playing a fools game.

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The Comeback of Oil
Oil prices have risen over the past few years from under $30 a barrel to roughly $75 today. The rise in oil generally is a negative for the U.S. economy as the U.S. was previously a net importer of oil. Now, the state of Texas alone produces more oil than either of Iraq or Iran. So their economy is not as vulnerable to oil price shocks. But if oil reaches $100 per barrel or more I would think these higher costs to business and the consumer could lead to recessionary conditions as they have in the past. We will see.

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China For Growth and Value 
China has become my favorite investment theme. With Trump’s saber rattling and protectionist attitude you will find Chinese securities have declined substantially so that they now are more attractive on a value basis than U.S. securities. Considering that their market has grown at three times the pace of the Toronto market and double the U.S. then they can be recommended for both value and growth investors at this time.