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IMF Rings Warning Bell, But U.S. Still Best House On The Block

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July 26, 2016
International monetary fund issues financial warning as global economy concerns grow.

The International Monetary Fund (IMF) last week issued an "urgent" call to the world's largest economies to implement more economic-growth boosting policies. The IMF said central banks needed to maintain ultra-loose monetary policies and should develop contingency plans in case the stagnating outlook shifts into a downturn. 

The U.S. Still Leads The Pack

Despite the growing concerns regarding the global economy, the U.S. remains "the best house on a bad block," says Sam Stovall, managing director at S&P Global Market Intelligence. Looking ahead at forecasts for U.S. economic growth, S&P economists expect average quarterly growth at 2.40% versus 1.75-2.00% for all other developed nations around the globe. 

Many analysts often shrug off comments from the IMF as old news. "A lot of people believe they are behind the curve. Those on Wall Street often say 'tell me something I don't know ' about IMF statements," Stovall says. 

That said, the IMF's message is not something to be totally ignored. 

Climbing The Mountain

"Economies are not decoupled," Stovall says. He likens countries around the globe to mountain climbers tethered together. "The U.S is the lead climber with a firm grip and solid footing.  But, it’s still vulnerable to other economies slipping and falling," Stovall says. 

"Right now, it's on the back of the U.S. to bring the rest of the world along," says JJ Kinahan, chief market strategist at TD Ameritrade.  

Kinahan pointed to interest rate policies in other G-3 nations, and said "Japan went to zero and many countries in Europe have gone negative. Relatively, our rates still look better, which is making our currency look stronger." 

What this means for investors is that the U.S. dollar and U.S. Treasury securities might likely remain safe-haven investments of choice during periods of market volatility, which could open the door for additional dollar strength this year. 

TD Ameritrade clients can monitor performance of the U.S. dollar versus the yen, pound, euro, and other major world currencies using Forex Trader as seen in figure 1.

FIGURE 1: MONITORING THE U.S. DOLLAR WITH FOREX TRADER.

Follow the dollar versus the euro, yen, pound, and other currencies with Forex Trader in the thinkorswim trading platform. Chart source: thinkorswim® by TD Ameritrade.  Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results. 

Stock Market Action

During the recent price run-up in stocks, which has taken the S&P 500 to new all-time highs, investors have been favoring safety over yield, Kinahan says. Going forward, now it's more important than ever to think in terms of "partials," he says when it comes to stock market investments. This could include a strategy of layering into a new position with percentages of available capital as opposed to an all-in approach. 

Stovall points to international stocks and says long-term investors should start thinking about a "reversion-to-the-mean." "International stocks have underperformed domestic stocks for six of the last eight years," Stovall says. The benchmark for developed international stocks is the MSCI EAFE index. 

"If you are underexposed to international stocks. Stay put. But, start thinking about nibbling at international investments. Sooner or later they will have their day in the sun again. In the meantime, however, wear sunblock," Stovall concludes.

International investments involve special risks, including currency fluctuations and political and economic instability.

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