The stock market has been enjoying a relief rally over the last few weeks, triggered by hope that the tariff situation will be resolved somehow. Gold and other risk-off assets pulled back, while the bond market is still confused. And all of a sudden (or not so suddenly), after the markets closed on Friday, Moody’s credit agency downgraded the US credit rating. Here is what they said:
“This one-notch downgrade on our 21-notch rating scale reflects the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns”
A couple of months ago, before the correction started, the S&P 500 was at one of the most overvalued levels in history. Now, it is back close to all-time highs again with the same absurd valuations, very little guidance from companies due to tariff uncertainty, a US credit downgrade, and outflow of capital from the United States. Does this look like an attractive investment?
Here is a chart of the 10-year US Treasury yield:
The chart looks bullish, and now that the downgrade has been announced, yields should start moving higher. We expect the news to put some cold water on equities and the bond market while providing a more favorable condition for gold and other precious metals.
Meanwhile, the biggest retail company in the world (Walmart) said that tariffs will raise prices. In response, the business-friendly president of the United States told Walmart and other companies to absorb the cost of the tariffs. I’m beginning to feel like “I’m back in the USSR.” So, what’s going to happen to those companies’ earnings? Nothing good!
At the same time, Congress is planning massive cuts to Medicaid, which will affect millions of low-income households and dampen consumer demand at a time when consumer sentiment is at one of the lowest levels in history. I haven’t seen more uncertain economic conditions since 2007.
We will face higher inflation and lower earnings, which will mean lower tax revenue for the government, reduced investments in the US, and lower consumer demand. There are better ways to reduce the deficits.
Here is the chart of GLD:
As I mentioned a couple of weeks ago, we expected a correction due to technical overbought conditions, and that’s what we got. Gold has corrected about 8% so far, and while it can correct a bit more, we are back in accumulation mode for natural resource stocks. Our fund is up 42% year-to-date with a high Sharpe Ratio. We continue to be bullish on Natural Resource Stocks for several reasons, mainly because of the scarcity of commodities, cheap valuations, and a mess created by our beloved government.
Dennis Leontyev
Dennis@NaturalResourceStocks.net
