Recent research continues to support the thesis that US large-cap blue-chip stocks will continue to be the primary beneficiary of the Fed’s policy of QE-to-infinity and other favourable macro forces. Here are just a few of the reasons for this:
- Janet Yellen will be taking over from Ben Bernanke as head of the US Fed at the end of January and she is just as (if not more) dovish than Bernanke. She is also a Keynesian and a follower of Michael Woodford, the man who’s policies the top central bankers are following.
- The US is currently the best looking economy in a bad neighbourhood.
- Back in the summer the Fed attempted to taper their $85 billion a month in asset purchases and they had to back down after the yield on the US 10-year nearly doubled in just a few months. Tapering of QE, therefore, is off the table for now.
- The Fed has a free pass for continued QE due to slowing economic growth in the BRIC countries which has led to lower commodity prices and thus lower CPI inflation.
- The US is currently benefiting from cheap energy thanks to the revolution in shale gas/ fracking.
- Due to the above (and a bunch of other factors), the US is enjoying a manufacturing renaissance.
- Many of the Dow 30 companies are breaking out of 10-year basing patterns.
- US companies are not cheap but they are not expensive either and they are also cash rich.
We are also just starting to see the beginning of what’s likely to be a mass rotation out of bonds and into equities. Particularly since bond investors are now starting to experience quarter-over-quarter losses.
Given the above, it is reasonable to increase exposure to US large-cap blue-chip stocks. The following companies all look good:
- Exxon Mobil (NYSE:XOM) - As you may already know, Warren Buffett recently took a large position in Exxon. The company pays a dividend of just under 3% and the dividend has been increasing at around 13% per year over the last 3 years.
- General Electric Company (NYSE:GE)
- Intel Corporation (NASDAQ:INTC)
- Apple Inc. (NASDAQ:AAPL)
- The Procter & Gamble Company (NYSE:PG)
- AT&T Inc. (NYSE:T)
- American Express Company (NYSE:AXP)
- 3M Co (NYSE:MMM)
- Wal-Mart (NYSE:WMT)
- Texas Instruments (NASDAQ:TXN)
Turning to gold. As this chart shows http://research.stlouisfed.org/fred2/series/M2V/, money velocity continues to fall. As discussed in several articles on this site, this is because the new money is just sitting in the banking system rather than making its way into the real economy. The current threat both in the US and in Europe is therefore that of deflation rather than inflation. Until this changes and we start to see inflation showing up in the CPI gold will continue to struggle. It is therefore reasonable to reduced exposure to gold , particularly the gold equities.
The threat of inflation or a currency crisis remains very real, however it is now looking like it’s going to be a while yet, and gold still may test $1,000 before it begins the final leg of its secular bull market.
And finally, UK property. Sooner or later the UK property market is likely to enter bubble territory, and all bubbles do eventually burst. However, in the mean time the outlook remains positive and UK property is likely to continue to benefit from ZIRP, QE, Help To Buy, Funding for Lending etc.