Already in the United States, wages are declining for the 90-plus million unemployed and under-employed. Already in the world, 2013 global inflation chimes in at its second lowest level since World War II. This is taking place at a time when the U.S. Federal Reserve has been unable to achieve price stability/inflation targets, in spite of nearly $4 trillion in existing QE dollar creation; this is occurring in spite of the fact that the European Central Bank (ECB) cut its benchmark lending rate to a scant 0.25% due to what President Mario Draghi describes as a period of “a prolonged period of low inflation.” And with European unemployment near a record of 12.2%, you can be sure there’s very little prospect of wage growth occurring.
So with all of this deflation talk, you might think that this places me in the bearish camp on equities. Not so. For one thing, all of the money printing efforts by the world’s central banks (e.g., U.S. Federal Reserve, Bank of England, Bank of Japan, etc.) have not ended, even with so-called tapering by the Fed. In fact, U.S. monetary stimulus through a variety of tools is roughly the same going into 2014. By the same token, the Japanese government believes that its campaign of QE has succeeded in pushing prices higher, as its “core” inflation measure logged a year-over-year 1% for the first time since the financial meltdown of 2008; Japan’s not about to slow down its electronic money creation with this perceived success. And Europe? Sooner or later, the ECB will decide to cut its benchmark lending rate to zero, and eventually, join Japan, England and the U.S. in quantitative easing, money creating endeavors. Everyone will fight deflationary pressure.
Understanding the most probable course of action by the most influential institutions, I see reasons to be optimistic in two key arenas: dividend-paying U.S stock assets and dollar-hedged foreign stock assets. Keep in mind, I am a money manager who respects the enormous power of trend-following and stop-limit loss order protection; therefore, I like the aforementioned areas as long as a representative ETF remains above its long-term trendline.
For example, WisdomTree Hedged European Equity (HEDJ) is above its 200-day moving average. Mario Draghi and the ECB’s ongoing need to battle deflation will mean more stimulus for the embattled region. Central bank intervention continues to be a bona fide boon to investors. Moreover, European equities trade at 20% discount to U.S. counterparts. And while U.S. stocks are breaking records, European stocks remain roughly 35% below all-time peaks. For all of these reasons, I expect HEDJ to outperform the majority of the stock ETF field on the upside.