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As America celebrated Independence Day this week its major share indices the S&P 500, Dow Jones Industrial Average and Nasdaq were at or near record levels after a remarkable bull run.
Just as the US economy still dominates the global economy despite China’s increasing importance, the US stock market dwarfs all others, with American shares accounting for more than the rest of the world put together.
This means the vast majority of people with any investments to speak of have some of their money in the US market.
American shares have been shooting up since the election last November.
The consensus on the US stock market at the moment is that after this strong run over recent times it is now ‘expensive’ in terms of how the price of shares compares to the earnings of the companies, both in historical terms and relative to other parts of the world now.
Many investors both professional and personal see this as being time to cash out to some degree.
The S&P 500 has put on 15% since October, the Dow Jones Industrial has risen 19% and the Nasdaq Composite is up some 26%.
Is this the right move though?
There seems to be a feeling that we are due a correction in US stock prices simply because we have not had one for so long. Looking at the US economy and balance sheet fundamentals of the big companies does not actually set alarm bells off though.
Unemployment is exceptionally low at 4.3 per cent, GDP growth remains decent and inflation is in check. A case can be made that the market will keep going up, or at worst just tread water for a while, so why sell?
The last thing stocks usually like is a rate rising cycle, however so far the US stock market has taken the well choreographed interest rate normalisation being carried out by the Federal Reserve in its stride.
This does not mean markets have become immune to monetary policy though. The rises seen stateside have been tiny, quarter percentage point moves that have been heavily hinted at well in advance. Any larger or less well telegraphed moves could still spook the market.
Another thing to factor into your thinking when making a call on how heavily to invest in US shares at the moment is to bear in mind that in all likelihood your exposure will come though passive funds which simply track the market.
With a relative lack of active US stock picking funds available due to it being very hard to outperform the main indices, the chances are your exposure to US stocks will be passive and therefore move exactly in line with the market.
This is great when things are going up, but means you are left with no protection if there is a general market fall.
Kully Samra, UK managing director at investment firm Charles Schwab sees little reason to expect a big fall in prices, but suggest keeping a close eye on whether earnings are coming in as expected for US companies.
‘My view is that valuations in the US are elevated; but in the context of low inflation, still-low interest rates, and ample liquidity, the stock market can support them,’ he said.
‘US stocks have had a remarkable, and recently drama-free, run over the past eight or more years. We are likely in a more mature phase, which could be marked by bouts of volatility possibly driven by Fed policy.’
Will the US bull market keep going? While shares are expensive relative to other markets the US economy and company balance sheets are in good shape still.
‘But liquidity remains ample, financial conditions loose and earnings growth healthy; which have underpinned this bull run for much of its history. The current double-digit pace of growth remains supportive of stocks; but any deterioration in the earnings outlook could be another reason for a market pullback. Those are the key things to keep an eye on as we head into the year’s second half.’
More concerned is Joe Foster, gold strategist at US asset manager VanEck.
‘Following the November presidential election the “reflation” or “Trump” trade took the markets by storm, he said. ‘Presumably, the belief was that pro-growth policies would ignite animal spirits in the markets that would stimulate business and prosperity. As President Trump has struggled to implement policies and his administration has been dogged by controversy, the Trump trade has unwound.’
‘Metals such as copper and iron-ore have given up much, if not all, of their post-election price gains. Gold has rebounded from its post-election losses,’ Foster said. ‘Interest rates have subsided and the dollar has fallen to pre-election levels. The one asset class that appears to still believe in the reflation trade is US equities.’
‘While the current stock market does not have the same feeling of mania seen before the tech bust, in the context of an economy that struggles to achieve 2 per cent growth, we struggle to justify current stock market valuations – and the Fed is tightening.’
‘Secular market tops and bottoms are notoriously difficult to predict, however, we believe the signs are there to make such a prediction for S&P stocks and gold stocks respectively,’ Foster added.
‘US corporate earnings have recently shown good positive numbers after many quarters of decline – particularly recovery in financials, energy and good growth in technology,’ noted Alan McIntosh, chief investment strategist at UK wealth manager Quilter Cheviot.
‘This in itself supports the rise we have seen in the US stock market and as long as this momentum continues, we don’t see a major fall in the US stock market any time soon. Any tax reform or spending measures from Trump would simply be an added bonus. It should be pointed out though, that it is not just the US market that is sitting at all-time highs – global stock markets are at all-time highs because global economic growth is rising.’