One thing’s for sure: the perma-bulls are definitely not going to like this one. The correction that began in September is “likely not over,” according to a note from analysts at Morgan Stanley, and a 10% stock market decline is likely to take place within the next two months.
The analysts cited multiple factors, including the lack of a fiscal stimulus deal, election uncertainty, and a surge in coronavirus cases. Meanwhile, Bank of America analysts said that stocks continue to trade at “statistically expensive levels” and that current 2021 earnings forecasts are “overly optimistic, especially without additional stimulus.”
It’s hard to know what will happen in the very short term, but when we extend our timeline, the picture becomes clearer. The safest way to invest in stocks now is to find an all-weather strategy. Peter Schiff provides a win-win scenario, saying, “A Trump win is good for the markets, but a Biden win is even better.”
How is this possible? There’s no question that the markets will rally if Trump wins because he’s pro-business. But what about a Biden win? The markets would still celebrate because a Biden win would mean massive stimulus and spending like the world has never seen before.
Despite the presidential win-win scenario, the potential for a sizable correction remains. On a technical level, the S&P 500 is up against a powerful resistance level and the bulls would need a sustained push to breach and hold above that level.
As Morgan Stanley Chief Equity Strategist Michael Wilson sees it, the 3550 level will be difficult to surpass in the near term. In support of this outlook, Wilson cites “very strong long-term technical resistance going back to the late 1980s.”
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At the end of the day, Morgan Stanley urges investors to remain “disciplined” when committing capital to new positions. Probably the easiest way to maintain that type of “discipline,” in my estimation, would be to maintain a balanced mix of large-cap stocks and precious metals and/or mining sector shares.
It’s well known that Warren Buffett’s firm, Berkshire Hathaway, is now mixing his usual brand-name stocks with a gold mining company. Many people were shocked that Buffett would do this, but it makes perfect sense in today’s unhinged markets.
Courtesy: Peter Schiff
If you’re not yet convinced that the economy and markets are disconnected from reality, check the chart above. For the fiscal year ending on September 30, U.S. revenues were basically flat on the year. Yet the total spending soared, coming in at $6.55 trillion, easily outpacing the $4.45 trillion spent in fiscal year 2019.
This puts America’s fiscal 2020 budget deficit at an astounding $3.13 trillion. At the same time, the U.S. national debt recently passed a depressing milestone of $27 trillion. And if you can believe it, the debt-to-GDP ratio currently stands at 137.21%.
The research indicates that a debt-to-GDP ratio over 90% stifles economic growth by about 30%. So, while a 10% immediate-term correction might or might not happen, there will be a reckoning in the markets at some point down the road.
Metals and mining stocks can offer both growth and protection when there’s trouble on the horizon. As mega-cap stocks bump up against resistance, small and medium-sized mining companies can still thrive as long as the demand outpaces the supply.
It’s actually a great time to consider silver, by the way. Silver is both an industrial metal and a monetary metal. Regardless of the events that take place throughout the remainder of 2020, both gold and silver can have a place in your portfolio. As I see it, you can either get precious metals exposure, or just be exposed.
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