Most Popular ArticlesNovember 17, 2009
The blue line shows the total return, including dividends, for the Dow since the beginning of the last century. The red dashed line is the historical trend of 9.9% annual growth, and it shows where the market is in a secular cycle. It shows undervalued conditions in 1974 and 1982, and overvalued conditions at the peak of the tech bubble. The signal is currently neutral; the blue line is almost precisely at the trend line shown in red.
Emerging markets, gold, and advice for those in the market
Although Davis was neutral about the longer-term outlook, he does not see parallels to a Japan-like lost decade. He said two features differentiate Japan’s plight from that of the US: Japan had a strong currency and negative money supply growth throughout its decline. “So far, we do not have those two factors,” he said.
He believes the economy bottomed in June and is looking for a “pretty sharp rise off the bottom.” But he said it’s hard to make a strong case for growth without consumer spending and with continued job losses.
“Emerging markets are in a secular bull market, just the opposite of where we are,” Davis said. While they are not yet in a bubble, he said, they could be soon. Although domestic equity funds are seeing outflows, Davis said foreign funds are seeing inflows. His optimism for emerging markets is based on favorable population demographics, and he said that if the dollar stabilizes and liquidity keeps up, “emerging markets are where you want to be.”
“I am a big bull on gold,” Davis said, which he believes is in a secular bull market. He does not believe the current gold rally is over, and as long as the Fed “trashes cash” by keeping interest rates low, he said, investors will move to gold. “That’s the 5,000-year history.” Like emerging markets, though, he cautioned that a bubble could soon form in the gold market.
Davis recommends hedging and option-writing to limit downside exposure for US equity investors. For those in the market, he recommends higher-quality stocks, particularly those with multinational exposure and ones with high dividend rates.Display article as PDF for printing.
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