Stock markets in the United States are expensive relative to markets around the world and we’re facing the beginning of a bear market, said Robin Griffiths, chief technical strategist for the London-based ECU Group.
“I’ll give you my opinion, which is absolutely crystal clear: We are in a bear market now,” Griffiths said in an interview with Financial Sense Newshour.
“The flow of funds shows (that) very large international investment groups tend to be taking profits on good-but-expensive US stocks and buying an equivalent European stock, not because (these funds) expect the European share price to go up, but because its cushion of value gives them protection on the downside,” he said.
Dow Theory Sell Signal
Griffith’s analysis suggests Dow utilities peaked a year ago, transports peaked last December, and the Dow now appears to have peaked as well. Also, among stocks on the New York Stock Exchange, over 80 percent were below their 200-day moving averages when the Dow Theory sell signal was triggered, he said.
“We had a rolling top that was slowly being made,” Griffiths said. “The index itself was being held up by fewer and fewer things, and the tipping point from bull to bear is in place. It would take a new all-time high on the major indices to override that.”
Though conditions are actually good in the US, Griffiths sees trouble ahead because of the global nature of the economy and the fact that China is slowing significantly, stating that no country is immune to global economic troubles. Also, he notes that forecasters are now cutting back on their predictions for better growth next year.
Shift from West to East
This represents a shift from the West to the East in terms of economic clout, Griffiths argues. He sees Asian markets in secular uptrends, though some happen to be in cyclical bear markets at the moment. In contrast, most Western markets are lower than they were in 2000, he added.
“This is painful stuff,” he said. “We’re moving from an era of 200-odd years … totally dominated by the West. … But we’re clearly moving into an era where first China and then later, India, will be bigger. And in fact in many markets, such as motor cars, China is already overwhelmingly the No.1 market on the planet.”
The good news is, many Western companies do well in Asia, and growth in the East doesn’t specifically exclude Western interests, he noted. Griffiths’ bigger concern lies in what he sees as extreme valuations in US stock markets, stating that there have only been three times in history where valuation ratios reached similar levels: 1929, 2000 and 2007. This means it’s highly unlikely we’ll escape without at least a cyclical bear market, he said.
Of course, it’s possible Fed intervention could change this story, Griffiths noted, but he doesn’t feel that’s the right way to bet. Instead, he sees a period of revaluation ahead.
“I think we need to get the value of the market down to more reasonable levels,” he said. “You can do that two ways: you can have a short, sharp fall, or you can have a long plateau-like period where price and earnings slowly catch up, pulling the valuation down.”
There are long-term forces in the form of demographics coming into play, and Baby Boomers have already reached peaked spending, he said. Fortunately, Millenials are lined up to drive a new bull market as members of this large generation becoming economically effective starting around 2020, Griffiths said.
He sees big momentum for this bull developing around 2023, driven both by demographics and new technology. However, his enthusiasm is tempered by the fact that, though there are more Millenials in total than Baby Boomers, as a percentage of the population, the younger generation takes a smaller share of the pie.
“I think we can be very optimistic from then on,” he said. “But we’ve got to get from here to there. And at the moment the lack of consumption from the retiring Baby Boomer is more powerful than anything that Millenial generation can pick up.”
With Baby Boomers moving into retirement, traditional safe havens such as US Treasuries aren’t providing the income savers require, Griffiths said. As inflation comes back, many retirees will face difficulties, and some may be decimated by low rates, he added. Though zero interest rate policies and quantitative easing helped the economy recover, Griffiths thinks core assets such as Treasury bonds have been mispriced.
“We’ve all been herded into quality equities … paying very rich prices for them,” he said. “And we’re dead vulnerable to losing capital.”
Griffiths sees positive conditions developing for gold, noting that for the first time in years, gold is above its 200-day moving average. He said that in any currency other than the US dollar, gold bottomed months ago.
In general, Griffiths advises investors to focus investment plans around near-cash assets and to only keep companies of such quality that they can be held comfortably.
Long-term, Griffiths sees Asian markets outperforming Western markets 20 years from now.
“This is the first year when the Indian economy is already growing quicker than the Chinese economy,” he noted. “That’s partly because China slowed down rather than because India sped up, but it is starting to happen.”
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