Gartman: Don't Buy Stocks, Consider Gold
Dennis Gartman is the man behind The Gartman Letter, a daily newsletter discussing global capital markets. For almost 30 years, The Gartman Letter has tackled the political, economic and social trends shaping the world's markets. ETF.com recently caught up with Gartman to discuss the latest developments in the financial markets.
ETF.com: The stock market continues to hit record highs on a daily basis, with the Dow up 11-straight sessions through Friday [Feb. 24]. You characterized this rally as a "melt-up." Should investors be happy about it, or should they be concerned?
Dennis Gartman: They should be egregiously concerned, because they have to ask themselves if they honestly believe all of the benefits that have been put forth by the Trump administration are going to absolutely come to fruition.
Will there be tax cuts as consequential as Mr. Trump has indicated? There'll be tax cuts, but will they be as consequential? Probably not. Will there be infrastructure spending? Not a question. But will there be as much infrastructure spending as the markets seem to anticipate? Probably not.
Those things make it difficult to remain bullish of stocks at these levels. The market can go higher, but it is at levels I find to be nosebleed territory. People should be very careful up here. New purchases are to be avoided; old purchases should be hedged up in some fashion using derivatives or options; and bring stop orders up close behind the market.
ETF.com: From what I gather, you think Trump's agenda is going to be bullish for stocks, but not as bullish as the market is anticipating.
Gartman: Mr. Trump's agenda is bullish for the economy, but not necessarily bullish for stocks. That sounds illogical, but it's not illogical at all.
Why do stocks go up before economies come out of a recession? Because at the bottoms—when the monetary authorities become expansionary—that money finds its way into the capital markets, because it isn't needed in plants, equipment and labor.
You get that period of time that stocks take off on the upside and the economy continues to dwindle, and everybody wonders how stocks can continue to go up. That's what happens at bottoms.
On the other hand, at the tops of economic expansions, when there’s demand for plants and equipment and labor, money has to come from somewhere―especially if the monetary authorities are starting to err on the side of being restrictive rather than expansionary, as the Fed currently is. At that point, money comes out of the capital markets and goes into plants and equipment and labor.
Trump's proposals and his agenda are very bullish for the economy. By definition, therefore, it's somewhat bearish for equity prices after this sort of extended rally.
ETF.com: Do you think we're close to the end of this bull market we've been in for eight years?
Gartman: We are; I would counsel people not to be a buyer of equities up here. If you’re an owner of equities, I would counsel strongly to bring stops up behind your positions, buy puts to protect those positions, sell futures to protect those positions, or write covered calls to protect those positions. I would tell you not to be a buyer of new equities. And anything that you had in the past, do something to protect those profits.
ETF.com: Another bull market that seemed to come to an end recently was in the bond market. Bonds sold off sharply last year and interest rates spiked up. Do you think the 30-year run in bonds is over, and will rates continue to head higher?
Gartman: Yes, I do. That 30-plus-year bull market, which began in August 1982, is over. It's hard to believe, but I was there at the beginning. I was there at the end of the previous bear market, and I was there at the beginning of this long, protracted bull market in bonds (or the long, protracted decline in interest rates). It's hard for me to make people remember, but in 1982, the 30-year bond had a coupon of 14.75%, and you couldn't give them away at the time. It was astonishing how bad the psychology was.
But since 1982, we've been in a 30-plus-year bull market; that bull market has ended. The trend is for higher interest rates, not lower. But you must also remember the bond market tends to move in multidecade, long-term trends. If we're in for 20, 30 or 40 years of higher rates, for the first 15 or 20 years, we'll see rates go up very slowly, and very marginally.
It's at the end of this next bear market―the last quarter―that rates will go up the fastest and prices of bonds will fall the most dramatically. So while interest rates are going higher, there's no reason to be panicky about that right now.
ETF.com: In this environment, where stocks are overvalued and bonds go down slowly, are there any assets you like right now?
Gartman: For the first time in a while, I think you should own commodities in general. You should own gold in dollar terms; you should own gold in euro terms; you should own gold in yen-denominated terms. Gold has started to be a bull market.
Also, for the first time in almost four or five years, I'm actually bullish of the crude oil market. Because the term structure had shifted and crude oil prices don't break on bearish news any longer, I'm starting to find myself turning bullish on that commodity.
Contact Sumit Roy at sroy@etf.com.
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