I’ve predicted that in 2018 the US stock market would suffer a series of crashes somewhat akin to the 1987 event, but smaller in size.
Clearly, these mini-crashes are starting to happen.
Having said that, I haven’t sold any of my US bank stocks and I have no plans to do so.
To understand why I’m still “long and strong” the bank stocks in this environment, look at this:
Bank profits are soaring because of tax cuts, QT, and rate hikes.
Corporate boards are still using the bulk of the profits for stock buybacks and bonuses for the “fat cats”, while throwing crumbs to the lower-paid workers.
As disgusting as that is, it’s a good environment to own stock market indexes, and a great environment to own bank stocks.
This is the stage of the business cycle where “big growth” transitions to “decent growth with inflation”. Simply put, in this environment bank stocks do well, growth stocks stumble, and gold stocks start to get modest liquidity flows from institutions.
As the cycle moves to “inflation with low growth”, growth stocks crash, bank stocks fade, and gold stocks soar.
US interest rates are rising now and poised to rise relentlessly for the next several years.
There are “institutional thresholds” of importance in major markets. For the US stock market, institutions will generally continue to buy stocks until the ten-year yield reaches the 4%-5% range.
Goldman is predicting four rate hikes this year and I’m predicting a minimum of three. The yield should get close to 4% by the end of this year.
I realise that most gold bugs are “stock market crash enthusiasts”. There’s no question that the US stock market has soared mainly because the “hot air” of QE and low rates has incentivized corporate boards to focus on stock market buybacks rather than worker wages and business expansion.