US markets have outperformed for a decade, but can this continue in the face of a woeful Covid-19 response and political uncertainty?
- The US economy contracted 32.9% from April to June putting an end to the longest expansion in its history
- Political uncertainty, high valuations and a weakening Dollar may also dent investor appetite for US equities
- Europe may emerge as a credible alternative
Whatever the protestations of Donald Trump, Covid-19 has had a devastating impact on the US. A wildly inadequate response from the government has let the virus run wild, with almost 5 million cases and 160,000 deaths. The consequences for the economy have also been disastrous; it contracted 32.9% from April to June putting an end to the longest expansion in its history.
The continued spread of the Covid-19 across the US makes any quick economic recovery seem unlikely. The US economy is expected to have added another 2.3m jobs in the latest report, but unemployment would still be running at around 10%. This is higher than during the Global Financial Crisis. Add in the volatility created by an election, high valuations and a weakening Dollar and US stock markets could lose their lustre.
Much will depend on whether the global technology giants can sustain the interests of investors. They have done so for almost a decade, but their crown is beginning to slip. They have been supported by loose monetary policy, which has lowered the discount rate and flattered their earnings, but it seems unlikely that monetary policy will loosen significantly from here.
Equally, flows into US markets have been supported by a strong Dollar. Investors could take a risk on the US market because gains in the currency would often help them out. The Dollar has been weakening as the US has lost some of its economic credibility. This may give global asset allocators pause for thought.
Of course, the tech giants continue to generate strong revenue growth. Most have been beneficiaries of the global lockdowns as people have relied increasingly on technology and social media to stay connected with work, friends and family. However, Democrat nominee and presidential frontrunner Joe Biden has threatened higher taxation for tech companies, which may dent profits. Equally, they continue to have the looming threat of anti-trust legislation.
With all this in mind, it seems unlikely the US can continue its current strength relative to other markets. Where might the money go instead? Morningstar data showed there were positive flows into actively managed European equities in June - the first time in 28 consecutive months. A far more effective response to the virus, a EUR750 recovery fund and emerging political harmony have left European markets looking more attractive. While it’s usually been a mistake to bet against the US, its time as top dog may have passed.
