4-Wheel Drive Portfolios and 3 Current Key Investment Themes

The S&P 500 remains near its all-time high and is closing in on the longest bull market on record. However, for the most part, even with unemployment at 50-year lows and consumer confidence resilient, investors are concerned and uncertain as to what lies ahead. Markets seem vulnerable to a wide variety of potential risks, including a possible escalation in trade tensions between the U.S. and China, which could serve to put the brakes on global economic growth. Investors also seem to hang on every utterance from the Fed and other of the world's major central banks in the hope that central bank liquidity will once again propel asset prices even higher.

Rather than being focused on the noise of the day-to-day, let's look at the research output from our proprietary model of the global capital markets, which is the result of over four decades of study, as a barometer for the current state and potential future direction of the markets. Our model research is indicating the potential for the following key investment themes:

  1. U.S. Equities appear significantly overvalued
  2. Emerging Market Equities appear relatively undervalued
  3. Gold may be the best hedge against the monetization of debt

Global Economic Trends

We believe there is a risk that the synchronized global growth of 2017 is now facing headwinds and could develop into a synchronized global economic slowdown. The U.S. economy, which has continued to grow faster than the rest of the world eventually could be pulled down by the weight of a slowdown in global growth. During periods of global expansion, geopolitics tend more towards globalization and cooperation among countries and regions. However, once the global economy slows, history has shown that there tends to be a rise in global conflicts with countries fighting over a fixed or even shrinking economic pie, as well as more heightened nationalism, populism, and protectionism. Another potential risk of a global slowdown is that it could hinder the capacity to service the unprecedented amount of debt currently being carried by governments, companies, and individuals alike.

  1. U.S. Equities appear significantly overvalued

We believe that traditional P/E ratio analysis may not be sufficient in providing adequate insight into equity valuations. Therefore, we have developed our own methodology for understanding equity market overvaluation by comparing 3EDGE's model of current P/E ratios adjusted for normalized profit margins to fair value P/E calculations that incorporate both existing and long-run cost of capital in addition to implied growth rates. Our model research indicates that U.S. equities are currently more overvalued than other major markets and nearly as overvalued as they were just before the bursting of the tech stock bubble in 2000 and just before the crash of 1929. Of course, it is also true that markets can ignore fundamental factors and become even more overvalued for a period of time before correcting to fair value.