Is the Market a Good Risk to Reward Bet?
Since last March, the S&P 500 has rallied from a low of 666 to over 1100. But just how much juice is left? Economic indicators have already peaked and debt on every economic level from the individual on up to governments continues to expand. While Keynesians may applaud debt growth, or even just argue that it is better than the alternative, they are missing a cardinal rule. Money diverted towards debt payments, is diverted away from income producing capital investment.
The proliferation of government expansion and debt expansion is strangling economic progression. Analysts willing to take this in account must admit that even the best case scenario will see slow growth for the foreseeable future. The burden of government and debt is too great to be ignored.
Considering this, the equity markets are likely to be capped with a hard ceiling. While the S&P could rally higher especially now that it is oversold, the risk seems larger than the reward at this point. Investors buying into this market now for a 10% gain could easily see a 20% loss before this year is over.
For those wishing to take risks by speculating, hard assets are setup for a much better risk to reward ratio. Both gold and silver have been forming price bases since last year, and could breakout by the end of the year. If for some reason the precious metals do not breakout, it would likely be due to a collapse in the stock market. In such a case, gold and silver will most likely hold up better anyways as they did in 2008. While the summer is traditionally a weak season for precious metals it may offer an excellent opportunity to accumulate silver and gold in small amounts as a hedge against the softening economy.