The US market has been labelled over-valued, over-concentrated and over-indebted, but still it continues to rise. What might disrupt its trajectory?
- The US market has outpaced its peers almost uninterrupted since the nadir of the financial crisis.
- Increasingly there is an ‘end of the party’ feel to the US markets.
- Trump’s trade war and the build up of debt in the corporate sector are worrying trends
The US market has a vocal group of detractors. It is over-valued, they argue, led by a narrow bunch of technology stocks. At the same time recession is looming as interest rates rise and corporate debt is at all time highs. And yet it continues to defy expectations, securing a place as both a growth market in buoyant times and a defensive market in difficult times. What explains this strength?
The US market has outpaced its peers almost uninterrupted since the nadir of the financial crisis. Partly this has been the turbo-charge of quantitative easing, but also it has been the dominance of technology stocks. At a time when global investors wanted earnings, nowhere was producing more reliable earnings than the technology sector.
The superior growth rate of the US economy was also a significant contributor. Yet for some time, markets did not believe that interest rates would rise as far or as fast as signalled by the Federal Reserve. This kept gilt yields low.
More recently, the market has been supported by the fiscal stimulus package, which put more money in the pockets of citizens and corporates. This has partially contributed to a surge in M&A activity - deal-making broke records in the first half of 2018.
However, increasingly there is an ‘end of the party’ feel to the US markets. Without the influence of the FANGS the S&P 500 would be down in Dollar terms this year. The fixed income market is now finally adjusting to a new reality on interest rates and the yield curve is close to inverting – an historic predictor of recessions.
Then there is the unpredictability of the US administration. Trump famously said that trade wars are ‘easy to win’, but there is no doubt that if China or Europe goes after key sectors in the US, such as technology, there will be a significant impact for the US economy. Trump will be aware there is a danger that rival governments target dominant sectors in key swing states.
Equally worrying is the build-up of debt in the corporate sector. This is now at a peak not since the financial crisis. While this is broadly spread, it suggests there is rollover risk and corporates will need to borrow at higher rates within the next few years.
The catalyst for a sell-off is not immediately clear, but the market looks increasingly frothy and risks are building up. However, a key problem remains the lack of a good alternative. If the US falls, the rest of the world probably won’t fare much better either. It’s a key dilemma for asset allocators from here.