You won’t hear it from most of the politicians currentlyThere’s a lot to worry about in the markets right now.
You have tumbling oil prices,weak global growth, andgeopolitical issues like Britain’s referendum in June about whether the UK will leave the European Union.
JPMorgan Asset Management has now released its quarterly “Guide to the Markets” report, outlining four key things it says investors should be concerned about over the next three months.
JPMorgan Asset Management’s chief market strategist for Europe, Stephanie Flanders, says the world has changed a lot since January and investors need to refocus on the firm’s four key concerns.
“With growth worries lingering on both sides of the Atlantic and the corporate earnings picture still subdued, the trade-off between risk and reward is much less attractive now than in earlier stages of the cycle, at least for equities,” Flanders said in a statement to Business Insider.
“The case for riskier parts of the fixed-income market looks stronger, given that many of these bonds are now priced for a recession that we do not think is imminent. But overall, it probably makes sense for investors to have a more balanced portfolio than in earlier stages of the bull market and to lower their expectations for overall returns.”
Peter Schiff, a top Libertarian financial analyst, provides one more argument on why a U.S. stock market crash is inevitable. He argues that the Federal Reserve knows well that the U.S. economy is weak, but it pretends it’s strong in order to help Democratic frontrunner Hillary Clinton enter the White House in November.
And because Fed policymakers, he claims, are sure about the frailty of the U.S. economy, they are not going to hike interest rates “at all in 2016.”
“They pretend it’s strong but they can’t raise rates because they know it’s weak,” said Peter Schiff, head of Euro Pacific Capital. “I would caution people against investing in U.S. stocks because I think the dollar is going to fall out faster than U.S. stocks rise,” he said in an interview aired on CNBC, advising investors to pour their funds into markets outside the U.S. “that have the wind at their back.”
Schiff argued also that the U.S. stock market is only up in U.S. dollars, but it’s down in almost every other currency in the world.
“Our standard of living is going down; our debt is going up; the U.S. economy is in a lot of trouble and the Fed doesn’t want to admit it because Obama wants to pretend that everything is great and so the Fed doesn’t want to peddle the fiction,” Schiff, the one-time Senate candidate, said.
The U.S. Dollar Index, which tracks the greenback against a basket of six currencies, has dropped nearly six percent since it reached a high of 100.51 in December.
The three major U.S. stock indexes have rebounded from the losses they incurred at the beginning of this year and are now just a few points below their all-time highs they recorded in mid-2015.
This year only, the greenback has weakened 10% against the Brazilian real, seven percent versus the Russian ruble, and 4.8% against the Singapore dollar.
Schiff blasted central bankers for “printing money.”
“The reason central banks want to print money is to bailout overly indebted governments and to prop up inflated asset markets, but all of this undermines legitimate economic growth and rising living standards,” he said. “What we need… is more production, with falling prices so that people can have a higher standard of living; but right now, the biggest enemy of higher living standards are governments and central bankers.”
The Fed decided in mid-March to leave its benchmark interest rates between 0.25% and 0.50%. It also projected only two rate hikes this year, down from the four rate hikes it projected in December, when it lifted rates for the first time in more than nine years.
In late March, Fed Chair Janet Yellen said the U.S. central bank would be cautious while raising rates as global risks remained, including uncertainty over China’s economic growth and cheap oil prices.
Financial markets forecast a 30% chance of an interest rate hike at the Fed’s June policy meeting, a 50% chance of such a move in September, and a 64% probability at the December meeting, Reuters reported on Friday, citing CME Group’s FedWatch. (Source: “U.S. job market flexes muscle; Fed still seen on hold,” Reuters, April 1, 2016.)
The stock market may be back on track, but nervous investors are still showering gold with tons of love.
An impressive $13.4 billion was poured into gold assets over the past 11 weeks, according to Bank of America Merrill Lynch. That’s the largest sustained weekly inflow for gold since during the 2009 financial crisis.
Gold is considered a safe asset that tends to rise in demand when people are worried about the economy or fear inflation. Gold skyrocketed earlier this year amid concerns of a recession andbear market in stocks. Gold is up 15% to $1,221 an ounce in 2016, crushing stocks and bonds.
The fact that investors are still betting big on gold is interesting since markets have calmed down considerably. Recession fears have receded, and oil prices have stopped crashing. The Dow is up about 2,000 points from its February 11 low and recently turned positive on the year.
All of this suggests “uncertainty about the future and a concern that some nasty surprises might lie ahead,” Barclays analyst Kevin Norrish wrote in a recent report.
What kind of “nasty surprise” might be on people’s worry list?
Many investors believe volatility will return later this year as the Federal Reserve attempts to raise interest rates. Others are concerned about unforeseen consequences linked to the experiments with negative interest rates by global central bankers in Europe, Japan and elsewhere.
This week Bank of America flagged a new global risk that would likely help gold: stagflation. It’s a nasty mix of stagnant growth, high unemployment and rising prices. The U.S. suffered through a stagflation experience in the 1970s when the OPEC oil embargo caused energy prices to skyrocket.
“Investors have been focused on deflation risks but may be underpositioned for rising inflation,” Bank of America wrote.
To be sure, stagflation doesn’t look like an imminent risk — inflation is rising but remains very low — and even BofA said it’s not the bank’s base-case scenario.
However, BofA thinks stagflation is a growing risk. During periods of stagflation, BofA said, slow growth and high inflation cause stocks to stumble and commodities — especially oil and gold — to outperform.
Even though gold has already had a terrific 2016, Capital Economics believes the yellow metal has more room to run. The firm expects gold to rise another 10% before ending the year around $1,350 an ounce.
Here are the four key concerns that JPMorgan highlights:
A reprieve from central banks — and different focus for investor concern:Investors started the year worried about falling markets in China, further falls in the oil price, and a potentially premature rate rise by the Fed. Now the concerns are slowing consumption growth in the US and Europe and rising core inflation in the US.
Uphill battle for returns bolsters the case for adding alternatives: Continued record-low bond yields and a maturing equity bull market are keeping the prospective returns on traditional assets low, making it a good time for investors to explore less correlated sources of return.
Brexit and beyond — political risk is creating a ‘wait-and-see mode’: Uncertainty around the coming EU referendum has already had an impact on UK corporate investment, the value of the currency, and short-term market interest rates. A vote to leave the EU could halve the growth rate over the next year and have a noticeable effect on activity in Europe.
Markets are from Mars; economies are from Venus: Equity markets have become disconnected from the performance of the economy recently, with main indices in the US and Europe disproportionately damaged by bad news from manufacturing and energy and slow to benefit from consumer-led growth. This may be about to change, but it’s a cautionary tale for index-based investors.