Stocks in the United States have soared since June 4th, 2019. This is when the Federal Reserve Chairman, Jay Powell, basically backstopped the stock markets after a steep sell off in May. At that time, he basically stated that the central bank would act appropriately to sustain the economic expansion. Going forward we have the next FOMC (Federal Open Market Committee) meeting scheduled for July 31, 2019. At this meeting, the central bank is expected to cut interest rates by at least 25 basis points. Some investors, analysts and economists expect the Federal Reserve could cut rates even by as much as 50 basis points at this next meeting.
As you see now from the performance of the stock markets, they have continued to climb in anticipation of further easing by the Federal Reserve. As smart traders and investors, the question we need to answer is, what is this saying about the future direction and how should we position our portfolios for it?
Tomorrow morning, ECB President, Mario Draghi, is expected to announce some type of easing in the European Union. It is obvious to see that this is basically synchronized easing from the central banks around the world. After all, yields are already negative in Europe. This has to make you think, what is the problem in the world that has these central bankers so worried right now? On July 8, 2019, Deutsche Bank announced another major restructuring that would layoff 18,000 employees. The bank has a massive derivatives book. This could become a big problem if one or more of the bank’s counter parties collapse during a future crisis.
Is this the smoking gun leading to more easing by the Federal Reserve and the ECB, or is there something else lurking out there?
Gold has been soaring as investors and traders continue to buy precious metals. As long as the central banks keep their dovish outlook, precious metals should continue to out perform. At this time, gold has been soaring higher despite a strong U.S. Dollar. Often in the past, when the U.S. Dollar has been strong gold has been weak, but not this time around. It seems that money keeps pouring into the U.S. Dollar from foreign countries. After all, Europe and Japan have negative rates and many investors are now losing faith in the Euro. So what is the play? Gold simply seems to be the logical winner in this environment. As long as central bank keep their dovish tone gold is the one asset class that should continue to benefit.