Oil, DAX and Nikkei Should Outpace U.S. Stocks Through Year End


August 9, 2016, 4:15pm EST

Yesterday we walked through some charts from key global stock markets.  As we know, the S&P 500 has been leading the way, printing new highs this week.

U.S. stocks serve as a proxy on global economic stability confidence, so when stocks go up in the U.S., in this environment, there becomes a feedback loop of stability and confidence (higher stocks = better perception on stability and confidence = higher stocks …)

That said, as they begin to capitulate on the bear stories for stocks, the media is turning attention to opportunities in emerging markets.  But as we observed yesterday in the charts, you don’t have to depart from the developed world to find very interesting investment opportunities.  The broad stock market indicies in Germany and Japan look like a bullish technical breakout is coming (if not upon us) and should outpace gains in U.S. stocks in second half of the year.

Now, over the past few weeks, we’ve talked about the slide in oil and the potential risks that could re-emerge for the global economy and markets.

On Wednesday of last week, we said this divergence (in the chart below) between oil and stocks has hit an extreme — and said, “the oil ‘sharp bounce’ scenario is the safer bet to close the gap.”

oil v stocks aug 1 2
Sources: Billionaire’s Portfolio, Reuters

Given this divergence, a continued slide in oil would unquestionably destabilize the fundamentals again for the nascent recovery in energy companies.

With that, and given the rescue measures that global central banks extended in response to the oil bust earlier this year, it was good bet that the divergence in the chart above would be closed by a bounce back in oil.
That’s been the case as you can see in the updated chart below (the purple line rising).

aug9 oil v stocks
Sources: Billionaire’s Portfolio, Reuters

At the peak today, oil had bounced 11% in just five trading days.  Oil sustaining above the $40 is key for the stability of the energy industry (and thus the quelling the potential knock-on effects through banks and oil producing sovereigns).  Below $40 is the danger zone.

In a fairly quiet week for markets (relative to last week), there was a very interesting piece written by former Fed Chairman Ben Bernanke yesterday.

Tomorrow we’ll dig a little deeper into his message, but it appears that the Fed’s recent downgrade on what they have been projecting for the U.S. economy (and the path of policy moves) is an attempt to stimulate economic activity, switching for optimistic forward guidance (which he argues stifled activity) to more pessimistic/dovish guidance (which might produce to opposite).

Remember, we’ve talked in recent months about the effect of positive surprises on markets and the economy.  We’ve said that, given the ratcheting down of earnings expectations and expectations on economic data, that we were/are set up for positive surprises.  Like it or not, that’s good for sentiment.  And it’s good for markets.  And it can translate into good things for the economy (more hiring, more investment, more spending).

The positive surprises have been clear in earnings.  It’s happening in economic data.  It looks like the Fed is consciously playing the game too.

This is the perfect time to join us in our Billionaire’s Portfolio, where we  follow the lead of the best billionaire investors in the world.  You can join us here