Stocks remain resilient

Until the past two weeks, geopolitics is something that the market has ignored for quite some time.

With North Korea saber-rattling with its missiles and the US firing off some of their own at Syrian targets, stock market volatility has increased.

In addition, the fear-trade seems to be on again with investors buying gold and US Treasuries.

A month ago, the conventional wisdom was that interest rates would be on a more or less straight-up trajectory.  The flight to safety has put pressure on interest rates to move lower as fearful investors buy bonds.

Additionally, the failure of the Trump Administration and Congress to come together to pass a new healthcare bill has called into question the ability to pass tax reform and infrastructure spending bills. These are both considered key economic drivers.

Despite all this, stocks have remained resilient and so far slight downward moves have been met with buyers who bid the indices back up.  However, there now are questions where there once was certainty and I get a feeling that markets are nervous.

This continues to play into my thesis that we will see some correction this year and caution is warranted.

Europe improves

Europe seems to be improving and the deflation that was gripping the economy, as well as the uncertainties of Brexit, are less of a downward pull.  The ECB has had its foot on the gas pedal to spark inflation and Brexit has gone from a question to a negotiation.

European stocks trade at lower multiples compared to US firms and I think represent a compelling value.

One piece to the Europe bull story is still missing and that is the result of the French election.  If the center holds and LePen is defeated, the fear of Euro disintegration should go away (for now) and I think money will flow into European stocks.  A center victory in France would allow the ECB to reduce its extraordinary measures and interest rates would likely rise in Europe.  The scenario would be very positive for European banks – a sector that is almost universally hated as an investment.

ECB policy change could move interest rates upward.  Europeans buying US bonds for yield have held US rates down. If rates in Europe rise, money will flow back to Europe.

Japan is a market to watch

Japan should also be on investors’ radar.  The massive central bank intervention there, as well as some welcome fiscal measures, might be moving Japan to better economic results. Japan is a tough place to figure out.  Its demographics are terrible for domestic consumption but it is a major exporter.  Japan’s corporate sector has large surpluses.  If the country can move some of these surpluses to domestic consumers, the deflation that has dragged down its economy for decades could be relieved.

Again, Japan is difficult to understand but stocks are cheap there and have been for a long time.  The Nikkei Index is still half of what it was at its peak in 1989.  It is still lower than it was in 2000. Japan is a market to watch.

— Ian Green, Pendragon Capital Management

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Note: This blog article is intended for general informational purposes only. Nothing in it should be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product.