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Is the US hot or not?

The Federal Reserve isn’t worried about the US overheating, but should investors be concerned?

  • Federal Reserve chairman Jay Powell sees no ‘elevated risk’ of overheating in the US
  • The S&P 500 bull run is now the longest ever, supported by buybacks
  • Valuations leave little margin for error

Federal Reserve chairman Jay Powell isn’t worried, yet. At the latest Jackson Hole symposium he tackled those unnerved by the current buoyancy of the US economy saying he saw no ‘elevated risk’ of overheating, pointing out that inflation remained at-or-near target. 

Nervousness about the US economy has been bubbling away for some time. However, the latest round of economic growth figures, which showed GDP growing at over 4%, has accelerated these fears. President Trump hasn’t helped, saying that the economy is ‘going to go a lot higher than these numbers’. 

There are other areas of concern. The S&P 500 continues to extend its bull run, now the longest ever. By almost any measures, valuations look extended and there are worries that they continue to be inflated by corporate buy-back programmes. Merger and acquisition activity is hitting new highs, with a number of mega-mergers in the healthcare sector driving volumes. This has typically been an ‘end cycle’ phenomenon. 

Few dispute that the US is closer to the end than the beginning of its economic cycle. The question is whether markets can still move higher and lucky investors can participate, but then get out in time. Trump’s fiscal stimulus may extend the cycle for another year or so, and therefore leaving the US market now may be premature. 

There are reasons to believe that the 4.1% growth rate was inflated somewhat by Chinese firms speeding up their purchases of US imports in advance of any potential trade war. The recent tax cuts have also given a boost to corporate spending, but this is a one-off. In this way, the growth rate may be artificially high. If this is the case, interest rates can continue to rise gently and the bull run can continue. 

The problem is that there is very little margin for error. Valuations leave little room for disappointment, as a number of the large technology names have found to their cost. At the same time, timing any exit from US markets is difficult. If the US overheats and inflation picks up, interest rates may have to rise rapidly and investors may have little chance to get out. 

Fund managers vary in their views. Many believe that investors have to go where there is the greatest growth potential – and that means the US. Others believe valuations are simply more attractive elsewhere. It is a tough call for asset allocators.


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