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Commodity Investing Shell Shocked
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Five years after the financial crisis, the Dow Jones Industrial Average has finally marked a new milestone—a new all-time high. The Dow’s previous high of 14,164.53 was recorded on October 9, 2007. But in the wake of the financial crisis, the Dow tumbled, shedding more than half its value to a low of 6,547, in March of 2009. The surge into unchartered territory has investors licking their lips about what lies ahead.

High corporate profits coupled with the U.S. Federal Reserve’s policy of easy money were the key factors helping to drive the Dow to a record close last week. Money managers all over the world are in a bullish mood as they contemplate the potential for future gains. What was particularly stunning about the Dow’s ascent was that it followed February’s lacklustre market performance.

The once giddy investment climate turned sour in February and investors removed their bets as the Italian elections and worries over inflationary pressures building in China caused investors to rethink their unbridled optimism. Broad market measures, such as the Morgan Stanley Capital International (MSCI) World index slipped 0.2% last month, as weakness in Europe overwhelmed strength in the U.S. In February, markets in the United Kingdom fell 3.1% while Italy tumbled a staggering 12% and Germany the engine of Europe conked-out falling by 4.1%.

Stocks continued their gains throughout the middle of last week as a private report from ADP Research Institute showed employers added 198,000 jobs last month, topping the median economist forecast for 170,000 and bolstering optimism ahead of the government’s March 8 th labor report. The Fed also indicated that the U.S. economy grew at a moderate pace across most of the country, citing rising consumer demand for homes and cars as the catalyst for February’s growth.

For investors the good news keeps on coming, as markets appear nowhere near the kind of cyclical turning point we were on the cusp of in October 2007, suggesting that markets have a ways to run yet. Since the bear market lows, some $10 trillion has been restored to U.S. equities, fueled by the fastest profit growth since the 1990s and monetary stimulus from the Federal Reserve. Retailers, banks and manufacturers led the recovery from the worst bear market since the 1930s as the Dow took less than 65 months to rise above its previous high—more than a year faster than the recovery from the internet bubble.

It may seem strange that companies are posting such big profits at a time when U.S. unemployment rates are 7.9 %, but joblessness is actually working to the benefit of corporations which are able to drive their existing employees even harder. In the process, companies are adding to earnings rather than expanding their payrolls, making it a virtuous circle for investors.

Investors have been flocking to cash-rich companies for the juicy dividend income they can produce, which in many cases is significantly higher than the yield available on fixed-income securities. The dividend yield on the Dow is 2.48 percent, while 10-year U.S. government bonds are yielding about 1.9 percent.

The bull market in stocks will likely continue as investors who’ve watched patiently from the sidelines as markets have move higher will join the party and forcing the market multiple higher. As yields on the 10-year U.S. government bonds start moving toward three percent, the 35-year bull market in bonds will finally be drawing to a close forcing yield-hungry investors back into the stock market.

My game plan for the months ahead is to continue overweighting stocks over bonds, and the U.S. over other developing markets. “Risk on” is clearly the order of the day and I have reduced slightly my exposure to Base Metals companies and Industrials while boosting my exposure to the Financials and Asset Managers in the expectation of more good times to come.

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