Brexit Creates Bear Market in Europe; Bull Market in U.S.

Doug Fabian

Doug Fabian is known for his expert knowledge of ETFs, bear funds and enhanced index funds to profit in any market climate.

Stocks here in the United States are doing well.

Although the market has stalled a bit over the past couple of days, we’ve seen a remarkable run higher after the “Brexit” vote in which U.K. citizens chose to leave the European Union. That ascent has pushed the Dow and S&P 500 to new respective all-time highs.

Now that we are in the heart of earnings season, markets are consolidating the recent gains; however, more good reports from key companies and we could be seeing another move to new highs any day.

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That’s not the case for stocks in Europe, as the region continues to suffer from a host of economic growth issues, as well as pernicious political issues such as immigration, terrorism and the rise of nationalist sentiment.

To illustrate just how downtrodden some of the Europe’s financial markets are, take a look at the charts below of the following exchange-traded funds (ETFs).

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Here we have the iShares MSCI Italy ETF (EWI), which fell to multi-year lows in July. Italian stocks are in a confirmed bear market, and when the third-largest economy in the region has its market trading like this, that does not bode well for the future.

Then there are the wider, “cream of the crop” stocks in the SPDR STOXX Europe 50 ETF (FEU). Think of this fund as the European version of the Dow or the S&P 500.

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Here we can see that despite a post-Brexit (late June/early July) rebound, the benchmark measure of the large-cap European market still trades below its long-term, 200-day moving average.

If you’re an investor looking to put on some international exposure, then perhaps the better way to do so is via the emerging markets.

Take a look at the chart below of the iShares MSCI Emerging Market ETF (EEM). This fund’s performance resembles the domestic market, as EEM now trades back up toward a 52-week high. The fund also trades well above its 50- and 200-day moving averages.

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If you want to diversify your U.S. equity exposure, then I think emerging markets are a much better way to do so right now than European equities.

Want to find out how my subscribers are currently taking advantage of the U.S.-European bull divergence? Then check out my Successful ETF Investing advisory service. For details, click here right now.

ETF Talk: Looking for a Diversified Fund from Vanguard?

This column is the first of our final two articles that will feature domestic dividend-based exchange-traded fund (ETFs). Vanguard Dividend Appreciation ETF (NYSE: VIG), the bigger of the two ETFs, is the one that I want to highlight in this write-up.

The Vanguard group is a well-known investment company with a top-notch indexing operation, so it should come as no surprise that VIG is a huge fund with $22.25 billion in total assets. The fund seeks to track the performance of a benchmark index that measures the investment return of the common stocks of many well-known companies, such as Pepsi (NYSE: PEP) and Microsoft (Nasdaq: MSFT).

VIG charges small fees and has an expense ratio of just 0.09%, which is low when compared with competing index funds.

The fund’s yield during the last 12 months has been modest at 2.16%, which barely beats the S&P 500’s return of 2.02% for the year. However, as can be seen in the chart below, the fund has had a strong run since the beginning of this year to notch a year-to-date return of 10.24%.

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View the current price, volume, performance and top 10 holdings of VIG at ETFU.com.

VIG’s top five holdings are Johnson & Johnson (NYSE: JNJ), 4.24%; Coca-Cola Co. (NYSE: KO), 3.86%; PepsiCo Inc. (NYSE: PEP), 3.86%; Microsoft Corporation (Nasdaq: MSFT), 3.70%; and Medtronic plc (NYSE: MDT), 3.07%. This fund’s top 10 holdings comprise 31.2% of its total assets managed.

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The fund is diversified by investing in companies from many different industries. If you are seeking to invest in a diversified, domestic ETF that pays dividends and is backed by one of the biggest names in the investment industry, Vanguard Dividend Appreciation ETF (VIG) may just be what you are looking to find

As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You just may see your question answered in a future ETF Talk.

Your First-Half Market Scorecard

The first half of 2016 is in the books, and it has been one marked by a lot of big price swings, much buying in safe-haven assets and heavy buying of stocks.

Check out the list here of some of the markets I monitor each day. Here you’ll find the performance data for each respective index, year to date through June 30.

  • S&P 500          2.69%
  • Dow                2.90%
  • Nasdaq           -3.29%
  • Nasdaq 100    -3.86%
  • Gold                24.65%
  • Silver              35.44%
  • Treasuries      15.19%

Although there was a decent move higher in large-cap domestic stocks, tech and large-cap tech struggled through the first half of the year. And while stocks generally experienced a back-and-forth first half, it was a different story entirely with safe-haven assets such as gold, silver and long-term U.S. Treasury bonds.

Gold and silver have shined so far in 2016, easily outpacing equities. More significantly, Treasury bonds also outpaced stocks by a wide margin.

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It is this boost in Treasury bond prices, one that has pushed bond yields down to record lows on the 10-year Treasury note, that has me feeling more than a bit uncomfortable.

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The reason why is because bond yields should not be falling so low when stock prices also are pushing up toward all-time highs. At some point, something has to give. If history is any harbinger of things to come, the bond market will win out over stocks.

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In a year that’s been fraught with some big bouts of selling, as well as some big buying, we now are at a place where we expect more volatility to continue.

Election uncertainty, Brexit outcome uncertainty, Fed uncertainty, etc., all will help determine what’s next for markets.

And while we can’t be certain of what’s going to happen, we can be reasonably sure that the markets are going to throw us at least a few curve balls along the way.

The only thing we can do, as investors, is to stay in the batter’s box and keep our eyes on the ball.

On the Meaning of Life

“I don’t believe people are looking for the meaning of life as much as they are looking for the experience of being alive.” — Joseph Campbell

Life can be beautiful, and life can be scary. If we’re lucky, we get to experience more extreme joy than extreme pain. The key to a happy life is to embrace the experience of being alive, as that is where you will find real meaning.

Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Click here to ask Doug.

In case you missed it, I encourage you to read my column from last week about how the market shocked everyone by reaching an all-time high. I also invite you to comment about my column in the space provided below.

Finally, join me at The MoneyShow San Francisco, Aug. 23-25, Marriott Marquis. Register free by calling 1-800-970-4355 or sign up at DougFabian.SanFranciscoMoneyShow.com. Use priority code 041201.

 

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