With the economy growing 2.4 percent last year, its best performance
since 2010, and major stock indexes continually hitting record
highs, enthusiasm is running rampant among many investors.
But, "high degrees of certainty can be dangerous,"
Peter Schiff, CEO of Euro Pacific Capital, writes in a
weekly commentary.
"Herd mentality can cause investors to chase returns and pile into
positions that may already be overvalued. But herds can be spooked.
. . . When that occurs, those who resisted the herd may find
themselves rewarded. We believe that we are approaching such a
point."
As for the economy, Schiff notes that GDP growth decelerated to 2.2
percent in the fourth quarter from 5 percent in the third. And
several economic indicators, including consumer spending, have shown
weakness in recent weeks.
As for stocks, Robert Shiller's cyclically adjusted price-earnings
(CAPE) ratio, which encompasses 10 years of earnings, shows the
market is overvalued, Schiff says. The CAPE ratio for the S&P 500
stands at 27.9.
So where should investors turn? Gold mining and energy stocks,
Schiff says. "The good news is that unloved assets may be
attractively priced."
Albert Edwards, global strategist at Societe Generale, isn't so hot
on the economy and stocks either.
"The downturn in U.S. profits is accelerating, and it is not just an
energy or U.S. dollar phenomenon," he writes in a commentary
obtained by CNBC.
"A broad swathe of U.S. economic data has disappointed in February."
One statistic he might have in mind is the 0.8 percent drop in
retail sales during January.
As for earnings, the 485 S&P 500 companies that had reported
fourth-quarter earnings as of Friday generated blended profit growth
of 3.7 percent, according to FactSet. And analysts predict profits
will fall 4.9 percent in the current quarter, according to
Bloomberg.
And what about the Federal Reserve's plan to raise interest rates,
perhaps beginning around mid-year?
"The economic cycle will be brought down by asset bubbles bursting
long before 'tight' policy has any effect," Edwards notes. "Lessons
were learned from the global financial crisis, but not that one."
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