Investors are discarding their misgivings and taking to heart Gordon Gekko's infamous dictum: "Greed is good." Stocks hover at all-time highs.
Gekko was the villain you loved to hate in the 1987 movie Wall Street. But amid all of this investor euphoria, you should instead heed the words of a real-life investment hero, Warren Buffett: "Be fearful when others are greedy, be greedy when others are fearful."
At this critical juncture, now's a good time to dive into my inbox of reader emails. In a minute, I'll answer a few questions that stood out. But first, I want to provide the investment backdrop.
FOMO syndrome...
Dangers are mounting, but investors have been cheered by better-than-expected third-quarter corporate earnings and stabilizing data about the U.S. economy. The Dow Jones Industrial Average yesterday eked out a record close.
The major indices in recent weeks have racked up an impressive winning streak. Last Friday, stocks posted their fifth straight weekly gain. Trading has been volatile and susceptible to headline shock, but stocks have nonetheless embarked on an upward trajectory.
In pre-market futures trading this morning, the three main U.S. stock indices were poised to open higher. "Animal spirits" reign.
To be sure, we've endured sharp mood swings. But overall, investors are shrugging off the risks. They're indifferent to the impeachment proceedings against President Trump and resigned to the political stalemate in Washington, DC.
The thinking among the investment class seems to be that because of gridlock, at least Congress can't do any harm. Despite the rancor on Capitol Hill, the Trump administration's pro-business policies remain intact and de-regulation continues apace.
The markets emerged from the much-feared month of October unscathed, which puts pressure on investors to pile into stocks. It's called FOMO syndrome (Fear of Missing Out).
FOMO represents lemming-like behavior at its worst. But for now, Wall Street is casting aside high valuations, trade war tensions, negative corporate earnings growth, dysfunction in Washington, the chaos of Brexit, and rising military tensions around the world. Investors are rotating into defensive sectors, which makes sense. But generally speaking, the bears have egg on their faces.
Well, I've been at this game for a long time. I never trust collective exuberance, especially when the macro-economic indicators are deteriorating. Manufacturing activity is slowing in major economies such as China and Germany and we're long overdue for a cyclical downturn.
The massive federal deficit keeps getting worse but Wall Street turns a blind eye. Now that they're in power, the fiscal hawks of yesteryear suddenly don't care about deficits. Investors will care, though, when the monstrous deficit fuels higher interest rates.
Forward price-to-earnings ratios are historically high but corporate earnings are about to record a third consecutive quarter of negative growth.
Everywhere you look, the math doesn't add up.
You can still make big profits in this market, but you need to make the right strategic bets. Let's see what's on your minds, so I can steer you toward those bets.
Here comes the sun…
"The Trump administration favors fossil fuels. Does current government policy make solar power a risky investment?" - Paul K.
I remain a big believer in solar energy as an investment. The cost of solar continues to drop, while at the same time the industry's infrastructure becomes more efficient and pervasive. End users are increasingly accustomed to affordable and reliable solar energy, a reality that has de-coupled solar from the price of oil.
For years, the dynamic was simple: as energy prices rose, solar became more attractive (and vice versa). That's no longer the case. Solar marches to its own tune, regardless of oil price fluctuations or government policy.
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As a long-term play, solar power enjoys a sunny future. But stick to companies with low debt, growing earnings and proven products in the marketplace. Avoid the thinly capitalized solar companies with sexy stories but lousy balance sheets.
The essential need for health services…
"How do you feel about the health care sector right now?" - Rita G.
During the late stage of the economic cycle, which we're now experiencing, health care stocks tend to outperform.
Health care will continue to benefit from unstoppable trends that are resilient to economic and financial cycles. People need medical care, especially as they get older and sicker, whether the economy is growing or not. Around the world, populations are aging and middle classes are rising. That spells long-term demand for doctors, hospitals and drugs.
For the third quarter of 2019, as S&P 500 earnings on average come in negative, five sectors are reporting year-over-year growth in earnings, led by the health care sector (see chart).
Racking up a year-over-year growth rate of 8.1% in Q3 is no small feat, when you consider that overall, corporate earnings are expected to eventually post a decline in the quarter of -1%.
In this frothy market, you need to pick your spots. Health care is a good spot to be.
Saber rattling around the globe…
"What are the worst sources of geopolitical risk right now and what does it all mean for investors?" - Gerald R.
The White House's hawkish foreign policy will continue to prove a wild card around the globe for as long as Donald Trump is in office. The administration's protectionist trade policies regarding not just China but the entire world elevates risk. At the same time, Russian President Vladimir Putin is growing more adventurous, testing the boundaries and resolve of the West.
A "black swan" could emerge anytime, from anywhere. Remember, these catastrophic events are by their nature unexpected. All it would take to trigger financial contagion is a terrorist attack, launched from a laptop.
Read This Story: Does a "Black Swan" Await Investors?
A major source of conflict risk is Asia, specifically the Korean peninsula where the rogue totalitarian state of North Korea continues to rattle its saber with missile launches and fiery rhetoric.
China is growing more assertive as Trump's "America First" policy causes the U.S. to retreat from various international agreements, allowing China to rush into the leadership vacuum. This makes China's neighbors in Asia nervous.
Increasingly violent protests in Hong Kong are spooking investors and could easily get out of hand. Chinese military intervention isn't off the table and it would probably trigger a sell-off in global stock markets.
The Middle East is another potential flashpoint, with possible disruptions of oil markets. Washington and Tehran remain at loggerheads, whereas Saudi Arabia's economic restructuring could sow civil unrest. The recent drone attacks on Saudi oil infrastructure is a reminder of the chronic instability of the Persian Gulf region.
Read This Story: Is Global "Oilmegeddon" On the Way?
Therein lies the investment opportunity: We'll continue to witness growing demand in the aerospace/defense sector, especially for high-margin jet fighters that are popular export products.
U.S.-based aerospace giants have done well in 2019; this prosperity should continue next year and beyond. I especially like small-cap electronics providers, which make highly sophisticated (and highly profitable) gear that the major defense contractors can't live without.
The 5G bonanza…
"I've been reading a lot about 5G. Telecoms are taking out newspaper ads, bragging about it. What's your view?" - Tim S.
The companies developing and leveraging 5G are huge money-making opportunities. Ultra-fast 5G wireless infrastructure also is a pivotal battlefield in the trade war, which shows no sign of relenting.
Read This Story: 5G: The Fight for the Future
Trade talks this week have made little progress. Optimism that a trade truce was imminent was dashed when President Trump last Friday said that he hadn't agreed to anything. And so it goes with the trade war, back and forth.
Trump is scheduled to deliver a major address on trade policy today. Sorry to be such a downer, but from his speech I expect zilch in terms of substance for investors. I'm cynical about political rhetoric in general, regardless of party.
And that's what makes 5G-related companies particularly appealing: their resistance to trade war tensions, political turbulence, and economic ups-and-downs. An investment in 5G is an investment in the future. 5G is a speeding freight train that can't be derailed by headlines.
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John Persinos is the managing editor of Investing Daily. Got questions or comments related to investing? Send him an email: mailbag@investingdaily.com
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