The Real Enemy for Investors: Which direction will the stock market go?

The enemy is anybody who’s going to get you killed, no matter which side he is on.

Joseph Heller, Catch-22

Here’s the thing about markets….

There are no goodies and baddies.

Just participants. Self-interested individuals. All trying to read the tea leaves and make the best decisions they can. For themselves.

But some participants are more equal than others. There are those few whose decisions can shape the markets.

Work out their motivations and you can stay one step ahead.

Which brings me to the latest news from the United States…

Yesterday, US Treasury Secretary Steve Mnuchin announced a $1 trillion coronavirus relief plan.

We’re prepared to act quickly. This is all about kids and jobs, this is our focus,’ Mnuchin said during an interview on Fox News Sunday.

How will this be paid for?

What does that matter?

As you must have realised by now, budgetary discipline is just a useful opposition tactic.

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Governments — whether they be from the left or from the right — never can resist the power of the printing presses when it’s their turn in charge.

Self-interest always trumps ideology, in politics, and most other places too.

But right or wrong, bad or good, it is what it is.

For you as an investor such news simply means a cold hard calculation to make.

It goes a bit like this…

Printing press versus politics — who will win?

Yesterday I talked in length about how the tensions between the US and China could have big ramifications for our entire economic model.

My colleague Greg Canavan has some strong opinions on this, and you really need to read his new report to understand the magnitude of the risks to Australia — and Australian investors.

You can read that report here now.

But myself, I take more of a trader’s approach to these things. I think you need to look at a situation from a number of sides, understanding that all is possible.

As the old trader saying goes ‘have strong opinions but hold them weakly.’

Simply put, you need to be able to react when the market lurches one way or the other. Come what may.

Right now, the market equation is pretty simple.

It’s basically the printing press against the politics. Cash against the coronavirus. The power of the US dollar versus China…

There are some signs — in the US at least — that the printing press is winning.

Check out this news I came across yesterday.

As reported in Reuters:

Sales of new U.S. single-family homes raced to a near 13-year high in June as the housing market outperforms the broader economy amid record low interest rates and migration from urban centers to lower-density areas because of the COVID-19 pandemic.

Housing makes up 3% of the US economy. But more than that is the confidence such news brings. House building only ramps up when people feel OK about the future.

Of course, market bears would say that with the coronavirus out of control in the US and 31.8 million people unemployed, this is a mere blip on the horizon.

And maybe that’s right…

But as we talked about before, be in no doubt, the government will throw the kitchen sink — in the form of wads of cash — at this problem in the meantime. It’s cash to paper over the cracks until we’re out in the clear.

And they’re doling it out more than ever.

Another part of the Mnuchin $1 trillion stimulus plan is the idea of covering 70% of people’s wages. Remember this is from a right-wing party who campaigned on budget discipline a few years back.

As I said before, follow the money and follow the self-interest, if you want to see what will happen next.

Meanwhile the trade war with China rolls on…I know, it’s a lot to get your head around!

What to do?

Which brings us back to my point at the start…

You’ll hear persuasive arguments on both sides telling you what will happen next over the coming months.

And you do really have to be ready for anything.

Now, to my mind, that doesn’t mean sitting in cash. That’s a false comfort, especially if markets continue to rally.

It means having a plan and a system that you can stick to.

The way I do that is simple. I follow the money flow.

Some areas I’m looking at right now based on this idea are gold (printing presses in overdrive!), medtech (ageing population), junior resources (some stirring in copper prices), uranium, and lithium.

Now these are all pretty speculative areas of course, and that’s what I specialise in.

Some are short-term trades; others are longer-term themes I think are inevitable.

But they’re all in areas that capture the big changes happening in society.

Which to my way of thinking means they should form part of someone’s portfolio — no matter how small — in all market conditions.

Regardless of what your plans are, make sure you have one. Because the real enemy in investing is usually yourself.

Good investing,

Ryan Dinse Signature

Ryan Dinse,
Editor, Money Morning

Ryan is also editor of Exponential Stock Investor, a stock tipping newsletter that looks for the biggest investment opportunities on the market. For information on how to subscribe and see what Ryan’s telling his subscribers right now, click here.

PS: This free report reveals three stocks that could surge on the back of renewed demand for lithium in 2020. Click here to get your copy now.

Ryan Dinse is an Editor at Money Morning.

He has worked in finance and investing for the past two decades as a financial planner, senior credit analyst, equity trader and fintech entrepreneur.

With an academic background in economics, he believes that the key to making good investments is investing appropriately at each stage of the economic cycle.

Different market conditions provide different opportunities. Ryan combines fundamental, technical and economic analysis with the goal of making sure you are in the right investments at the right time.

Ryan's premium publications include:

Money Morning Australia