As we get ready to wind up the week, we wanted to share with you a few thoughts about our outlook going forward along with our favorite 5-positions that align with these ideas.
There is a lot of “hope” currently the Fed’s monetary policies will completely offset the ramifications of an economic shutdown and a reversion of earnings. However, we are not so sure as:
- A major support of asset prices over the last decade, stock buybacks, are gone.
- Jobless claims hitting levels never seen in history
- Unemployment at 15% or more, and will be a long-time in recovering.
- Dramatic declines in both consumer and investor confidence.
- A loss of many small businesses which make up 45% of GDP and 70% of employment.
- A draining of corporate coffers.
- Lack of access to capital or credit markets outside those loans guaranteed by the Fed.
- Surging mortgage forbearance.
- Rising consumer credit card and auto-defaults
- A dollar funding shortage
- A sharp decline in retail sales and personal consumption expenditures.
I could go on, but you get the idea.
It ain’t good.
Importantly, this will all translate into the most important thing for the markets – earnings.
As I noted last Tuesday in “Chase Momentum Until Fundamentals Matter”
The other problem is investors remain overly optimistic about the recovery prospects for earnings going into 2021. As shown, in April 2019, estimates for the S&P 500 was $174/share (reported earnings) at the end of 2020. Today, estimates for Q4-2021 now reside at $147/share. Such is a 15% contraction in estimates when we are discussing a 30-40% decline in GDP.”
“With expectations for the S&P 500 to return to all-time highs in 2021, such would mean that valuations currently paid by investors remain at historically high levels.”
With that analysis, and a bit of an understanding of our expectations of the economy, and markets, going forward, here are the 5-stocks we like the best in our portfolios currently.
With the economy opening back up, we previously discussed our position in CLX as the need for disinfectant will continue. This is also why we like PHG which manufactures ultraviolet (UV) lights for disinfectant purposes.
Phillips also has a heavy concentration of their business in the health services field which will continue to benefit from the COVID-19 pandemic for quite some time.
With the stock breaking back above the 200-dma, we could see prices move higher. We will look to add to our exposure on pullbacks.
- Target Price: $50
- Stop Loss: $40
There is a common theme between our Equity and ETF portfolio: “Long Staples, Healthcare & Technology, and out of most everything else.” The reason is that these sectors continue to outperform the S&P overall, and have a bit of “virus” protection to them.
On the healthcare front, we continue to like our holdings in ABBV which we have owned since September 2019. We have previously taken profits and reduced holdings and then rebuilt the position since the lows.
Currently, ABBV is very overbought, but we will look for any weakness that holds the breakout level to increase our position size. (We also like our holdings in JNJ, ABT, and UNH for many of the same reasons.)
- Target Price: $110
- Stop: $80
Back to our “reopening” story, we recently repurchased V. We owned it previously since early 2019, took profits a couple of times and sold it entirely in early March. We have added the position back to the portfolio as a beneficiary of the reopening process given they profit as shoppers return to the previous activities.
While they will have credit loses to contend with due to unemployment, much of that is relegated to the issuers which are the banks. (A reason we don’t own banks.)
After clearing the 200-dma, V has continued to climb back towards old highs. The position is overbought so we do expect a pullback to the 200-dma at which time we can increase our exposures.
- Target Price: $215
- Stop: $170
Our last two positions are the repeated from our previous report, as we seriously love these two holdings for the long-term.
The first is GOLD. There are three reasons we own gold.
- The Fed
- The Fed
- The Fed
While monetary stimulus has not been proven to be inflationary in the past, as it is an asset swap, this time may be different because of the economic shut down.
With massive amounts of liquidity sloshing around the market, when the economy re-opens, eventually, there could well be an inflationary impulse that gets ahead of the Fed. If inflation heats up this will be good for gold. In such a case, the Fed would need to reverse the monetary jets to avoid inflation. Given it took 7 years after the financial crisis to even begin QT, we find it probable the Fed will be even slower this time.
Also, as noted below, we own gold to offset the risk of a global dollar shortage which is becoming a serious problem currently in the global markets.
Lastly, gold tends to act as a “hedge” against market volatility which reduces our overall portfolio risk if something happens to break.
- Target Price: $20.00
- Stop: $15.00
The second is the DOLLAR.
Our long dollar position is very important to us.
“The Federal Reserve has identified the Achilles heel of the world economy: the enormous global shortage of dollars. The global dollar shortage is estimated to be $13 trillion now, if we deduct dollar-based liabilities from money supply including reserves.
How did we reach such a dollar shortage? The reason is simple, domestic and international investors do not accept local currency risk in large quantities knowing that, in an event like what we are currently experiencing, many countries will decide to make huge devaluations and destroy their bondholders.
According to the Bank of International Settlements, the outstanding amount of dollar-denominated bonds issued by emerging and European countries in addition to China has doubled from $30 to $60 trillion between 2008 and 2019. Those countries now face more than $2 trillion of dollar-denominated maturities in the next two years and, in addition, the fall in exports, GDP and the price of commodities has generated a massive hole in dollar revenues for most economies.
If we take the US dollar reserves of the most indebted countries and deduct the outstanding liabilities with the estimated foreign exchange revenues in this crisis … The global dollar shortage may rise from 13 trillions of dollars in March 2020 to $ 20 trillion in December … And that is if we do not estimate a lasting global recession.” – Mises Institute.
This is why we are long the dollar now, and will likely increase it to as much as 10% of our portfolio in the future.
The Federal Reserve can not “fix” this problem. It is too big and it is growing. The rest of the world needs at least $20 trillion by the end of the year. Even if the Fed increases their balance sheet to $10 trillion, the US dollar shortage would remain.
“In the current circumstances, and with a global crisis on the horizon, global demand for bonds from emerging countries in local currency will likely collapse, far below their financing needs. Dependence on the US dollar will then increase. Why? When hundreds of countries try to copy the Federal Reserve printing and cutting rates without having the legal, investment and financial security of the United States, they fall into a trap of ignoring the demand of their own currency.” – Mises
- The dollar is going to rise and likely by a lot as the global recession intensifies.
- A strong dollar is not good for the stock market.
Have a great weekend.
Lance Roberts is a Chief Portfolio Strategist/Economist for RIA Advisors. He is also the host of “The Lance Roberts Podcast” and Chief Editor of the “Real Investment Advice” website and author of “Real Investment Daily” blog and “Real Investment Report“. Follow Lance on Facebook, Twitter, Linked-In and YouTube