July 2014 - US equities
Back in November 2013, two of the main US stock-market indices reached all time highs. The Dow Jones hit 16,000 and the S&P 500 hit 1,800. Cue lots of questions being asked about the outlook for US equities, talk of asset bubbles and market corrections.
The bears (a name given to people who are pessimistic about the outlook for markets) seemed to have a point. Looking back at the past 10 bull markets (a term used to describe rising markets), only three had posted better returns than the current one, and only two had lasted longer(1). At the time, the S&P 500 had returned 141% (2) in sterling terms, since the market bottomed in March 2009. The average return for the S&P 500 in a bull market is 140% and the average length of a bull market is just 2.2 years. So it's no wonder people were questioning how long it could last.
But, as Andrew Goldberg, Global Market Strategist at JP Morgan Asset Management pointed out, while US stocks were certainly no longer cheap, they were not expensive either. Also, asset bubbles tend to coincide with peaks in the economic cycle and the developed market economy has a long way to go until we reach such conditions.
The picture today
Today, as those over the pond celebrate Independence Day, the bulls (or the more optimistic) seem to have won the argument so far. The S&P 500 and Dow Jones have continued their upward climb, with the Dow Jones surpassing 17,000 (3).
The economy was unexpectedly derailed slightly in the first quarter of the year, as growth was lower than expected. However, this has largely been put down to the icy weather at the start of the year and should only be a temporary blip, before the upward trajectory continues. That said, strong economic growth doesn't necessarily translate into strong stock markets.
In our view, at FundCalibre, continued stock-market gains will be dependent on companies starting to see improved earnings growth, or in other words, that their net income is growing. At the moment corporate earnings are flat and will only improve if companies start investing in their future. For so long now, Chief Financial Officers have been sitting on cash, afraid to spend, as the economic environment was so unsure. This behaviour needs to change.
So for the moment, until we can see that earnings are going in the right direction, we are more cautious on the US stock market than we have been for some time.
Elite Rated US equity funds are:
(1) Source: JP Morgan, Standard & Poor's, FactSet
(2) Source: FE Analytics, as at 1st November 2013, total returns in sterling
(3) As at 4th July 2014
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Clive Hale, Director - July 2014
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