Consider these global ETFs as Trump's tariffs push the world away from the U.S.

Dow Jones

16 Mar

MW Consider these global ETFs as Trump's tariffs push the world away from the U.S.

By Jonathan Burton

Market strategist Keith McCullough: Stock markets in Europe and Asia will be stronger than the U.S.

'People are going to be buying dips that are not dips.'

Stocks come with higher investment risk, of course; that's why their rewards are greater. But U.S. investors should understand that U.S. stocks, right now at least, may not bring the greatest rewards.

The reasons for this shift aren't difficult to see. In the U.S., tariffs, trade war, federal budget battles, inflation and slashed government spending are among the recent upheavals that are fueling uncertainty among investors, consumers and business alike. Stock and bond investors around the world are also concerned; they are questioning American exceptionalism and turning away from the U.S. in favor of their home markets.

All of this has taken a toll on U.S. stocks and the U.S. dollar (DX00), and given the advantage to financial markets in Europe and parts of Asia in particular.

Keith McCullough, the CEO of investment service Hedgeye Risk Management, looks at these changes and sees opportunity. He's able to do this because unlike many investment managers, Hedgeye's positions are not tied to benchmarks, beliefs or borders. Hedgeye's active portfolio, including one with McCullough's family money that he discloses to subscribers weekly, is geared to go-anywhere in the world, into any type of investment, long or short. Much of the portfolio uses exchange-traded funds, which are cheap and liquid.

But being able to go anywhere and do anything with money isn't enough. McCullough and his team try to establish an investment position if not first, then early. In this way, McCullough hopes to front-run both Wall Street and Washington, so that when decisions are announced and the crowd reacts, Hedgeye has already bought or sold, accordingly.

McCullough spoke with MarketWatch recently, sharing his near-term outlook for stocks in both the U.S. and international markets, and what he expects from the Trump administration and the U.S. Federal Reserve that will move stocks, bonds and the U.S. dollar over the next few months. (McCullough provides detailed tips on his investment practice in a free e-book: "Master The Market: A Hedge Fund Manager's Guide to Process and Profit.") In this interview, which has been edited for length and clarity, McCullough encourages investors to look outside of the U.S., to be more proactive, and to expect the U.S. Federal Reserve to cut interest-rates as the U.S. economy slows.

MarketWatch: For many investors, the recent U.S. stock-market volatility is surprising and unnerving. Moreover, many financial advisers and money managers are also shocked. What should investors fully comprehend so they're realistic about this new investment landscape we're facing?

McCullough: People want to be long-term investors. But right now we have to risk-manage political change. There's no way around that. I mean, you can close your eyes and pray, but hope is not a risk-management process. I don't subscribe to the view that you just buy stocks and dollar-cost-average.

People are going to be buying dips that are not dips. People are going to chase rallies because that's all they know how to do, and that's not going to work either.

A lot of people are top-heavy in U.S. equities even with the decline. It's always a good time to to have a broad allocation, but even more so now. Rotate into other assets. You want exposure to precious metals, fully loaded with gold; bonds, both U.S. Treasury bonds and high-yield bonds, and international equities.

There's this uniquely American, dogmatic view of investing. Germans don't share it; Chinese don't share it. Just think about in common sense terms. If every day you wake up and the president of the United States says, "I'm gonna do these bad things to you because we're better than you," what are you going to do? Just roll over? No. You're going tp go inward, and not only that, you're going to partner with the people who don't do that to you. Expect more of this. Expect the alliance between Asia and Western Europe to strengthen.

So for example, the German population is bullish on electric vehicles and unbelievably bearish on the Tesla $(TSLA)$ brand. You just can't do what Elon Musk does and Donald Trump does and have Germans say, 'oh, yeah, I'm going to buy a Tesla.' I think that they're so egotistical, they didn't really think it through, but now the market is going to make them.

'It's a major problem that most Americans don't own any gold or silver.'

MW: Describe your investment strategy, which is especially generous in terms of its scope, and where that's pointing you now.

McCullough: I have a diversified go-anywhere strategy - anywhere in the world, any asset class. So I don't have to be long the Nasdaq COMP. I can be long gold (GC00), silver (SI00), and gold miners, which we are through the VanEck Gold Miners ETF GDX. I do think it's a major problem that most Americans don't own any gold or silver.

I've started buying TLT - the iShares 20+ Year Treasury Bond ETF TLT - because the U.S. economy is slowing. That's the problem now. I'm not going to blame Donald Trump. That would be easy. But I certainly blame the economy and the uncertainty embedded therein. Nine of 13 economic data points in our model have been slowing.

So when things are slowing then we position our portfolio for that. The way to do that is to get defensive. We're long gold, U.S. Treasurys, high-yield corporate bonds. We were long bitcoin (BTCUSD) and sold all of it. We were long the Nasdaq through the Invesco QQQ Trust QQQ and sold all of that too.

On the other side of this, we're long European equities, using the Vanguard FTSE Europe ETF VGK, because while the U.S. economy is slowing, Europe is accelerating. There are very few times I can remember in economic history where this has happened.

There's been a moment, a massive political change in Germany with the recent election leaning center-right and a new infrastructure spending plan. And it's easier to deal with positive political change than with Trump's tariffs, which are like a choke-chain on the U.S. stock market. I'm also long Poland, with iShares MSCI Poland ETF EPOL and Sweden, with iShares MSCI Sweden ETF EWD. We're also long the British pound (GBPUSD), using FXB .

MW: Europe has outperfomed the U.S. so far this year and the Trump administration policies are weakening the dollar, so that's been a good call. What looks attractive in Asia?

McCullough: In Asia, I'm long Singapore, with iShares MSCI Singapore ETF EWS. India is a short and we're out of Japan - neutral on the stock market but long the yen (USDJPY) through the Invesco CurrencyShares Japanese Yen Trust FXY. In our model, China could reaccelerate in the back half of this year, so China is on my buy list.

MW: Currencies are a big part of your investment portfolio, but the currency market is murky for many investors. Why should U.S. investors in particular bother to hold currency positions?

McCullough: The U.S. dollar DXY is going to continue to break down, and the purchasing power of the American people is going to deteriorate at a time when most Americans can't afford it. We think the dollar will be down 12% to 15% from its cycle high when the economy is accelerating. That would put the euro (EURUSD) around 112, 115 - definitely north of 110.

Currency positions are lower beta. Foreign exchange, FX, is a lot easier than stocks. There's far less narrative from amateurs, whereas everybody's got a story when it comes to stocks.

'We're looking for at least three rate cuts - 75 basis points - this year.'

MW: There's increasing concern that the U.S. economy will slow into a recession, and that puts pressure on the U.S. Federal Reserve to cut interest rates - the "Fed put." But many market observers are skeptical that the Fed will rescue Wall Street - yet again. We certainly haven't seen this so far. What's your view?

McCullough: The Fed has a three-pronged policy: the labor market, price stability - and the S&P 500 SPX. And now you have significant market risk. The "Magnificent Seven" stocks have broken down, the labor market is deteriorating with these DOGE cuts, and the U.S. economy is slowing.

So what then is the scope for the Fed? We're looking for at least three rate cuts - 75 basis points - this year. That's what my model is saying right now. There's not a lot of room here if inflation is not going towards the Fed's target. But Wall Street begs when the stock market's going down - and they absolutely will. I don't fight the Fed. So that's my math and I'm sticking to it.

U.S. Treasury Secretary Scott Bessent basically says we don't need Fed rate cuts to achieve the Trump administration's goal. If bond yields are going down, it's because the economy is slowing and that means the U.S. need to focus on getting back to growth.

So he gets it, but do you think Donald Trump wouldn't like rate cuts? Give me a break; the guy is the most levered investor. So Trump will want rate cuts. Bessent is going to have to do some some some creative calisthenics to undo what he's already said on this, but don't watch what they say, watch what they do. Democratic administration or Republican, the view is that when the economy is slowing and the stock market's going down, the Fed needs to cut interest rates.

MW: Rate cuts ought to be a positive for U.S. stocks and bonds. Until then, where are you finding value in the U.S. market?

McCullough: We've found value not in its traditional sense, but in the "Trump trade" - where there's an explicit government policy to help the sector.

Two sectors are natural gas (NG00) - we own United States Natural Gas Fund UNG - and steel. Reshoring, bringing jobs back, is a four-year plan. So there are a lot of single stocks that are deep-value in steel and natural gas. That's where I'd be doing the work.

MW Consider these global ETFs as Trump's tariffs push the world away from the U.S.

By Jonathan Burton

Market strategist Keith McCullough: Stock markets in Europe and Asia will be stronger than the U.S.

'People are going to be buying dips that are not dips.'

All of this has taken a toll on U.S. stocks and the U.S. dollar (DX00), and given the advantage to financial markets in Europe and parts of Asia in particular.

People are going to be buying dips that are not dips. People are going to chase rallies because that's all they know how to do, and that's not going to work either.

So for example, the German population is bullish on electric vehicles and unbelievably bearish on the Tesla $(TSLA.UK)$ brand. You just can't do what Elon Musk does and Donald Trump does and have Germans say, 'oh, yeah, I'm going to buy a Tesla.' I think that they're so egotistical, they didn't really think it through, but now the market is going to make them.