Why US equities need a trade deal The US economy is losing momentum which could weigh on corporate profit growth
T
he US stock market safely negotiated October this year, as the S&P 500 index gained 2% in the month and reached a fresh all-time high in early November. The Dow Jones Industrials and NASDAQ Composite have also surged to new peaks. Market accidents are usually caused by the combination of rising interest rates, earnings disappointments and an economic downturn or recession, in conjunction with lofty valuations which provide no protection from this trio of challenges. The good news is that interest rates are falling, the US economy is growing and the third quarter earnings season is almost finished, with positive earnings surprises outpacing negative ones by a ratio of 4.4 to 1, according to Standard & Poor’s. What could possibly go wrong? The answer is quite a lot and it is worth checking each of those possible catalysts for a correction, just to ensure that investors can manage risk most effectively in the context of their own personal portfolio strategy, target returns and time horizon.
FEDERAL FRENZY It is easy to pin the latest surge in US stock prices on Federal Reserve policy. The US central bank has cut interest rates three times this year and begun to intervene in the interbank lending markets with a resumption of its bond-buying programmes. While chair Jay Powell is insisting this is not a return to quantitative easing, the renewed expansion of the Fed’s balance sheet would say otherwise. Its assets have just swollen at the fastest pace since the height of the financial crisis in 2008. A lot of cheap cash is looking for a home and equities seem to be a logical choice for many, as price momentum is tempting and the 1.9% dividend yield compares favourably enough with benchmark US 10-year government bonds.
By Russ Mould AJ Bell Investment Director
The US economy is still growing, more than a decade into the post-crisis recovery and the third quarter GDP growth number of 1.9% was steady enough. However, the Atlanta Fed GDP Now and New York Fed Nowcast services are forecasting an increase in the fourth quarter of just 1.0% and 0.7% respectively. This does hint at a loss of momentum and raises the stakes for the trade talks between Washington and Beijing in particular, since the surge in the benchmark US equity indices is at least partly predicated on Presidents Trump and Xi reaching a settlement. THE US ECONOMY SEEMS TO BE LOSING SOME MOMENTUM 4.0%
GOP GROWTH
3.0% 2.0% 1.0% 0.0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4E 2016 2017 2018 2019
Source: FRED – St. Louis Federal Reserve database, Atlanta Fed GDP Now for Q4 2019 estimate
14 November 2019 | SHARES |
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