What a year we’ve had so far.
Pandemic, recession, unprecedented money printing, and, of course, the stellar rise in stock prices.
Despite the massive crash in February and March, the S&P 500 is up 4.63% in 2020, while the tech-heavy NASDAQ is up by 28.36%.
Those are extraordinary returns given all that’s happened.
And as we’ve entered the second half of the year, now, the question on everyone’s mind is whether this rally will continue, or was it all a fluke.
Let’s see what the months ahead will bring us.
It’s All About The Money Printing, Argue The Bulls
Let me start by disappointing you.
I have no idea whether this market will go up or down. Not exactly the answer you would expect from a stock analyst.
But understand that arguments for and against further rise are equally convincing.
On the one hand, stocks are in an uptrend. Physics teaches us that a body in motion tends to stay in motion. And this is true when it comes to the stock market as well. Although we like to use the phrase “The trend is your friend.”
The fundamentals tell the same story—further upside ahead.
The central bank money printing, which has arguably been the single most important driver pushing stocks higher for the last decade, is not going anywhere. We are likely to see it continue at the same pace for at least another year or two. Remember that nothing is as permanent as a temporary government program.
You must also consider that we are going to exit the recession in this quarter, and this has historically been the best time to invest in stocks.
Finally, if you look at the companies that are pushing the market ahead, these are all names that can grow their revenues in a Covid-environment—Google, Facebook, Microsoft, Amazon, Apple, and the like. So there’s little reason for their stock prices to decline.
Bears See Mounting Risks Ahead
The problem we as investors face today is that the bearish arguments are just as compelling.
First, while the unprecedented money printing has helped the stock market reach new all-time-highs in a recession (crazy when you take a second to think about it), it has also created inflation.
Excluding the volatile food and oil prices, the U.S. consumer price index (CPI) surged 0.6% last month. This might look like an insignificant number to you, but it will become less so when I tell you that this is the highest monthly increase in 30 years.
Of course, one month alone is not enough to cause panic, but it could be a sign of things to come. If inflation picks up too fast, investors will view it negatively and start selling stocks.
Next, you must consider that stock valuations are the most expensive they’ve ever been.
The total market capitalization of U.S. stocks compared to GDP, also known as the Buffet indicator, is at 177%, the highest level ever. For comparison, during the Dot-com era, it reached only 140%.
Does that mean we’re in a bubble? Given the rapid rise in stock prices and weak economic fundamentals, I’d say that’s a high probability.
Finally, with autumn around the corner, we are approaching two high risks.
The first one is health-related. So far, the world, except for Putin, hasn’t come up with a Covid-19 vaccine, and it’s unlikely we’ll have one until 2021.
This is particularly dangerous because with autumn also comes the flu season. Meaning there’s a high chance this is going to cause a major wave of new infections, as well as new deaths. Doctors almost universally agree that contracting both flu and Covid-19 significantly slims your survival chances.
The second risk coming in the fall is the elections.
And this is not because a Trump or Biden victory will have a dramatic impact on the economy. It’s because both are going to ratchet up their rhetoric, the closer we get to November.
Trump is going to take an even tougher stance on China, while Biden will promote social policies. They will be doing it to attract voters, but neither message will help the stock market. Escalation of the U.S.-China trade war would harm the global economy, and social policies, necessary as they may be, mean higher taxes and, thus, lower corporate profits.
As you can see, the bears’ argument makes just as much sense as the bulls’. That’s why I can’t give you an answer where the stock market will move next. It’s 50:50.
A Better Risk: Reward Alternatives
Investing is all about probabilities. And a 50:50 probability is equal to gambling. Avoid such trades.
Personally, I’ve decided I’m waiting until after the elections before I make any major moves in the stock market. That is unless we see a large correction happen before that, in which case the risk: reward probability would improve, given me a reason to turn aggressive.
But that doesn’t mean I’m sitting on cash. There are attractive investments in the market.
At this moment, there are two that stand out for me.
The first one is precious metals.
Gold and silver just had the first major pullback after the rapid price increase. This pullback happened primarily because gold reached previous all-time-highs, and has hit some technical resistance.
The fundamentals, however, haven’t changed. I’m not going to dive into those, because I wrote about them before. You can read that article here. The same is true for silver. The fundamentals are still excellent. I wrote about silver in this article.
All of which means this is an excellent buy-the-dip opportunity for those who are not yet invested in precious metals.
The second trade I like is Bitcoin.
Every indicator points to a new cryptocurrency bull market on July 26. Making this the start of a multi-year trend, and an ideal time to buy.
Plus, in the Past Recommendations section, you can find my top three gold stocks, which I still consider a strong buy.