The Darlings of Davos

Global equity markets roared this week and even accelerated to new all-time highs on the close.  Growth Stocks and Big Caps continued their tear, up over +2% for the week. However, some global equities did even better that the US, like China, which outperformed US equities by 2x.

Trump shocked the economic elite at Davos by acting presidential, which no doubt had a big impact on the markets. He said America is “back” and open for business.  He referenced tax cuts, deregulation and that he is willing to negotiate reasonable deals to attract foreign investments.

Ray Dalio, head of Bridgewater, who was concerned just a few weeks ago that the recent tax cuts could cause potential civil unrest because of income equality, said this week, that if you are underinvested, you will look “stupid” in this goldilocks economy.

Goldilocks means low inflation, decent growth (not too hot) and a calm monetary policy. Currently, chart patterns are intact and are very bullish for US equites. Market internals are not showing frothy behavior.  Are you ready for a parabolic move?

At the same time, Soros spoke at Davos this week and warned that Trump and Putin are a threat to western democracies and humanity.

The Doomsday Clock was reset this week as well (two minutes to midnight) and moved humans the closest they have been to world annihilation. This begs the question, what’s an investor to do?  One strategy is to diversify holdings into two timeframes. Short term, buy stocks. Longer term, buy Twinkies, which have a shelf life equal to the half-life of plutonium.

For some more specific ideas, Emerging markets and China are the leading equities markets, while the dollar remains under pressure. The real outlier is China, as not only is its equities market on fire, its currency is as well. In pure absolute terms, holding Chinese stocks in local currency is best.

The yield curve is flattening and the key thing to watch is long term bonds which are on the cusp of a major reversal from its 30 year down trend in rates.

Defensive sectors remain on the defensive which is positive. The only yellow flag is that volatility rallied this week despite the run-up in equities, a divergence that is worth noting, and could indicate some short-term weakness.

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