Reality has finally hit the fan, with most economists now realizing that the U.S. economy is about to enter a recession, if we’re not already in one.
Meanwhile, most of the so-called Wall Street “experts” are now telling everyday Americans to invest in defensive sectors of the market, such as the consumer staples and healthcare sectors. Yet, those same “experts” — mutual fund portfolio managers and financial planners — have failed to mention that even “defensive” stocks tend to decline in value during economic downturns.
So, what’s an investor to do?
My advice is to ignore the Wall Street “experts” and instead to use some very basic logic in determining where to invest your money. Right now, that means staying in cash or cash-like investments, such as money market funds or short-term CDs.
If you’ve unfortunately followed the advice of the so-called experts over the past 12 months and are therefore currently fully invested in the financial markets (i.e. equities, bonds, commodities, real estate investment trusts, or precious metals), now is probably not the time to go to cash. That’s because those financial assets, other than precious metals, have likely already suffered their biggest declines and will likely rebound sharply over the next 12 months.
The near-term direction of precious metals prices is more difficult to determine at this time because of the conflicting influence that falling real estate prices and rising consumer goods prices will likely have on that asset class. Although precious metals prices tend to rise when inflationary pressures increase, we’re currently in an environment characterized by depreciating real estate prices and appreciating consumer goods prices.
Looking forward, I recommend that you monitor ongoing developments in emerging regions of the world (such as China and India) and that you prepare to invest in securities that will likely benefit from those countries’ expanding economies once equity prices there hit a bottom.
Although my research indicates that economic growth will continue to slow in China, India, and other emerging economies over the next couple of quarters, primarily as a result of the deteriorating U.S. economy, the long term outlook for those countries remains very favorable.
Keep in mind that consumers in those countries have tasted the fruits of capitalism, and there’s no turning back to the old ways of doing business there.
As China’s and India’s economies continue to expand, their citizens (which compose 37 percent of the worldwide population) will continue to demand better housing and food products, as well as better medical care and more automobiles, consumer electronic devices, and various other goods.
Meanwhile, governments in China and India, as well as other emerging countries, will be forced to build more roads, bridges, and rail lines and telecommunications systems, while business enterprises will need to modernize and increase the size of their manufacturing facilities.
As the world’s emerging economies continue to expand their basic infrastructure, the demand for energy (i.e. oil, coal, nuclear power), and basic building materials (iron, steel, platinum, copper) will continue to rise. Countries that have large quantities of those natural resources (such as Brazil, Canada, and Australia) will therefore also likely grow at a fast rate during the years ahead. And, those countries' financial institutions will likely follow the same path of growth.
So, don’t get discouraged.
I’m very confident that some tremendous investment opportunities will be presented over the next six to nine months. And, there’s a sound reason for my confidence: Unlike the Wall Street “experts,” my forecasts have been very accurate over the past 12 months. My investment recommendations have also worked out well, as subscribers to my investment newsletter, The ETF Strategist, can attest.
For example, the value of my Aggressive Portfolio recommendations has appreciated, on average, 16.8 percent since the inaugural edition of that newsletter on September 18, 2007. In comparison, the S&P 500 Index has fallen 28.4 percent.
Click here for a trial subscription to my investment newsletter, The ETF Strategist.
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