2015, Mid-Year Market Outlook- USA
Last update: July 12, 2015
USA Economic Health
Realities
Beginning of 2015, the Federal Reserve (FED) had been expecting continued economic growth. But there was still no decision on the timing of an interest rate
increase, which would be a first stop towards “normalisation” of monetary policies. The accommodative monetary policy has kept the purchasing power of its currency in a state of prolonged weakness for over six years. Over 2014 and 2015, the USD regained much of its strength and position as the most sought after currency . As a
result, imports have become cheaper, the risk of inflation stays very low, and the
country experiences a large inflow of foreign investment.
Meanwhile the US recovery remains very much on track, helped
by low oil prices – and America’s ability to make a success at “fracking”,
which reduced its dependency on oil imports, though not necessarily its
dependency on oil. Since unemployment fell below 6%, tensions among investors have been mounting,
unsure as to when the dreaded interest rate hike will come.
The FED & President Obama seek a
“self-sustained, vigorous recovery”
… and they largely depend on local consumption to
orchestrate it. Yet, the increasing purchasing power of Asia’s flourishing new
Middle Class citizens creates additional demand. However, the likely success
depends on how they communicate their policies in the interim. Any “wrong” or
ill-timed message has a tendency to impact immediately on financial markets.
The USA economy, according to
Jan Hatzius, Goldman Sachs (early 2015 outlook statement)
- “Economy to grow 3%; in three key areas, home building, consumption & investment”.
- A pre-election year, coupled with looming political gridlock => good for stock markets…
- Higher degree of self-sufficiency in oil a major bonus for businesses and consumers, - and the country’s budget deficit!
The USA economy, as in
the “State of the Union” Address
Described as Obama’s “victory speech“, the US president addressed
the congress on 21-1-2015, unburdened by any “election worries”, recounting how, under his presidency, a
struggling economy turned into a thriving economy with lower “…deficits, bustling industry, and booming
energy production”.
Here some quotes:
Here some quotes:
- With respect to oil and gas, - in 2014 “…domestic production satisfied 84% of local energy consumption.”
- As for job creation, “creating 800.000 jobs, helps families & business buy the things they want.”
- In his view, the US will “lead the world, … dictate the pace.”
- “Middle class economy works!”
- He wants “new trade deals from Asia to Europe that aren’t just free, but fair”.
- “21st century businesses will rely on American science, technology, research and development.”
I don’t quote from his speech because I am totally
enthused. Rather, his statements give emphasis and positive impetus to
current trends. The US knows of its advantage in the current market place and wants to make the most
of it.
One question remains: after six years of economic and stock market growth, can America grow unimpeded, despite the problems in Europe, Japan's Abenomics impact, and Russia's attempt at derailing any progress?
One question remains: after six years of economic and stock market growth, can America grow unimpeded, despite the problems in Europe, Japan's Abenomics impact, and Russia's attempt at derailing any progress?
Investors dream of the "safest bet"
For most ‘blue-eyed’ investors, the USA still is “the
safest bet”! Besides a sound economy, 2015 is a pre-election year, which, statistically,
has been mostly positive for US stock markets in the past. With quantitative
easing stopped in October 2014, the USD has attracted EUR, ROUBLE, YEN and more money in other currencies, though not with the notion of ‘safe haven’, but sheer opportunism. If any
currency is due to strengthen it must be the USD, on the basis of the US
economic strength and impending hike in interest rates.
Foreign currencies are pummelled by more versions of QE and
interest rate cuts by their respective central banks. Thus, investor flock to
the USD, buying USD assets, stocks and bonds.
USA Stock Market Handicaps
Politics…
There is talk of lame-duck president, no longer commanding a
majority in the House of Representatives. The Tea Party, GOP, now controls
congress, who control what laws will come into force, reigned in only by the threat
of presidential vetoes.
Updated July 12th: Surprisingly, the congress was more cooperative in 2015 than many had feared, at least after a few presidential executive orders and some raucous arguments. Nor did we see, Obama backing down, let alone become a lame duck. I still think, America fails to see the [POSITIVE] changes, his presidency initiates, most of which will only become apparent in a decade or more.
I am somewhat concerned that even those who want to be seen as witnesses to events – rather than participants and judges – are turning a blind eye to the social changes happening. America is in transit. Yet, the “conservatives” (small 'c', not referring to the party members) are concerned with is to “conserve” a status quo. But even “tinned food” will go stale, after the “sell-by date”.
Updated July 12th: Surprisingly, the congress was more cooperative in 2015 than many had feared, at least after a few presidential executive orders and some raucous arguments. Nor did we see, Obama backing down, let alone become a lame duck. I still think, America fails to see the [POSITIVE] changes, his presidency initiates, most of which will only become apparent in a decade or more.
I am somewhat concerned that even those who want to be seen as witnesses to events – rather than participants and judges – are turning a blind eye to the social changes happening. America is in transit. Yet, the “conservatives” (small 'c', not referring to the party members) are concerned with is to “conserve” a status quo. But even “tinned food” will go stale, after the “sell-by date”.
Geopolitical Tensions
Sanctions on Russia, imposed by Western countries in retaliation of their involvement in Ukraine
crisis, don’t just hit the Russian leadership and economy. They also affect
world trade. Russia in turn returned to Cold War dividing lines, spiced up by renewed
fight over oil (low prices!), power struggles and religious fervour.
Escalating political instability & terror is overwhelming
almost every Muslim country between Afghanistan and Tunisia. For the time
being, ideology wins the day. Weapons aggravate. Peaceful solutions remain
elusive, seemingly impossible.
Then there is Greece, which few seem to understand, Iran
that wants a greater role in the world but resists the idea of following the
Japanese model of non-proliferation.
Lastly, there is the pretentious notion about a failing China, its “inept leadership” with “aggressive intentions” and military ambitions, all buzz words of the Western press. We all insist to speak only the language of the world, we restrict ourselves to believe in. And so we fail to see…
Lastly, there is the pretentious notion about a failing China, its “inept leadership” with “aggressive intentions” and military ambitions, all buzz words of the Western press. We all insist to speak only the language of the world, we restrict ourselves to believe in. And so we fail to see…
Stock Market Signals
We saw increased stock market volatility in Q4 of 2014. I asked in January 2015: Is this a sign of things to come?
Update July 2015: It certainly was!
The first half of 2015 experienced a multitude of rallies and corrections in
financial markets, as individual country markets and asset classes became less
and less correlated.
We also observe more currency volatility often as a result of central bank interventions like last year, when Swiss National Bank (SNB) took action to “unpeg” the Swiss franc from Euro, or the European Central Bank (ECB) policies and fiscal measures, all of which put pressure on the USD and trade balances.
We also observe more currency volatility often as a result of central bank interventions like last year, when Swiss National Bank (SNB) took action to “unpeg” the Swiss franc from Euro, or the European Central Bank (ECB) policies and fiscal measures, all of which put pressure on the USD and trade balances.
Market Down-Days
Every “corrective day” in the stock market is accompanied
by news headlines decrying the “vicious impact of overseas economic low down on the American
economy”. So much apprehension indicates
the high level of jittery still prevalent in the markets since 2008. It is not a sign of
irrational exuberance, which supposedly precedes the “bursting of a bubble”.
Still, the bull market is old, but tired? Not entirely.
USD strength
A strong USD not only hampers US exports. It’s a drag on
profits of international companies, too. As long as Americans are buying
ardently, the damage is contained. But
when consumption slumps, problems will quickly build up. It certainly is one major concern, the decision makers will need to bear in mind, when timing the planned interest rate hikes.
The Voices of Doom:
True to their cause, they proclaim: “2015 brings stock market trouble”. To name some prominent
exponents, there is ‘Dr Doom’ himself, Marc Faber. Then there is the hedge fund icon, Felix
Zulauf. and the "One-who-broke-the-British-Pound, George Soros; two Swiss & a
Greek, getting agitated by Europe's turmoils?
What about the Warren Buffet Indicator? At the end of 2014,
it produced a ‘Sell Alert’ based on its unique TOTAL MARKET CAP to GDP Ratio!
Do they have a point or is this just a case of “knickers -
or rather ‘long johns’ - in a twist”?
Well, I hope that the reader don’t take
the doom and gloom mongering too seriously. It is tough to escape fears. Others will try and rule by fear because they don't have a substantially better model. But fear is useless when it comes to forward looking decisions. Fear in the
stock markets rakes in millions for those who brush it aside.
USA Stock Market News
Strong Stock Market Gains in 2014
Earnings statistics support the continuation of the recovery.
The P/E Ratio for the S&P 500 is said to be between 16-18 (depending on the
source). Update
July 12, 2015: Especially after the most recent corrections, these figures
suggest that the index is “Not oversold, technically”.
Foreign investors to the US bank on the USD strength and a
rise in US asset prices, promising a double whammy return.
How will a future rate increase affect corporate earnings? And
stock prices? The suppositions flood the news channels daily. There are precedents and so I accept that there might be some smart guy who can arrive at a reasonably educated
guess. Even if a "true" prediction is out there, is it conceivable to find, identify and take appropriate action amongst the news noise?
US Index Returns last year
Foreign investors count their returns in their respective currency, and not necessarily in USD. This means
that realised returns for foreign investors depend on how their reference currency fared
against the USD.
Take a EUR investor whose reference currency, 1 EUR, dropped from about $1.37 to $1.10 (rounded figures!). He would have experienced a double whammy return: US index up + USD stronger. Even a simple US$ deposit account would have earned him close to 20%, “risk-free” (well – at least nominally risk-free).
Take a EUR investor whose reference currency, 1 EUR, dropped from about $1.37 to $1.10 (rounded figures!). He would have experienced a double whammy return: US index up + USD stronger. Even a simple US$ deposit account would have earned him close to 20%, “risk-free” (well – at least nominally risk-free).
 |
| S&P500 2014, January to July 2015, source: Chartnexus |
US Indices
Returns
in
USD,
S&P
500 +7.5% NASDAQ +21% Russell 2000 +5.1%
Add differential for USD/SGD pair:
USD
gains 7.5%, or SGD lower by 7.1%
Total return in SGD: Index
Return + currency gain ≈15%.
Update July 2015: The green line is a trend line from back in 2010. So far, the index has repeatedly returned to this upward trend, despite some very volatile moves along the way. But, we see that over recent month the index low (and high) points have formed an arch (in orange), and of late, we see lower highs and lower lows being recorded. Still, I consider it way to early to categorically say that this spells the end of the rally overall.
US Fund Returns
 |
| US Equity funds, registered in Singapore, und in SGD. Source: iFAST Financial |
To compare "like for like" the chart here contains US equity funds as registered in Singapore, and the valuations in SGD.
US fund returns reflect the individual strategy and investment focus of a fund.
Except for one, funds produced >15%, the passive total return. Good enough?
Note the difference between highest and lowest equity fund return: 30%! It pays to seek advice.
F.A.Q. stealthily answered
Q1: “Quite high, can still buy?” A1: “Selectively”.
Q2: “Buy last year’s weak performer?” A2: “Not necessarily.”
USA in 2015 – Second Half - Expectation Summary
Prospective annual equity returns
Pundits forecast: between “>10% to -20%”; banks / fund houses
project “+5 to +10%”. Well, banks have something to sell, so they won’t
forecast negative returns – ever!
My view: positive returns to peak late summer… [Update July 2015: so far, I have been right. We saw a major
peak in June. I am still positive for the coming 2 months, despite the likely
volatility here and there. However, the USD may see some softness, until the
rates really increase.]
Which Equities: large, medium or small caps?
Large & mega cap stocks in high demand, 2014. Investors
buy “less-risky” asset first, as usual, i.e. don’t write off large and mega
caps for no good reason. Mid- and small-cap stocks lag. This is changing. [Update July 2015: so far, right again. Small caps
outperformed large caps in the first half, but also experienced the greater
volatility on down-days. No change going forward.]
Bond Returns? The outlook said: Mixed, for Treasuries, High Yield & Corporate Bonds.
The timing of interest rate hike is key for treasuries, and
investment grade bonds. They are said to be the most vulnerable asset to hold when
rates increase. Corporate bond prices less susceptible to rate change, and
traditionally are more correlated with equities. It will be crunch time for
bond issuers as they need to take account of a rising interest environment.
[Update July 2015: bond prices have
seen heightened volatility, and negative performances. This is a sure warning of just how sensitive
punters react when the “low risk” asset class is exposed to higher rates. I am
not comfortable about this asset class, and going forward, we should not
categorise it as “low risk”. It will be
interesting to see where the low risk investor will turn to obtain a risk
equivalent, ‘safe’ yield.
Higher earnings projected were projected for 2015. [Update July 2015: not so sure that we can rely on earnings
as a projection of the stock markets in the next six months!]
USA in 2015 - Second Half - Bottom Line Advantages
A strong U.S. dollar is good for US travellers
abroad, though hurting American exports. The country is the only developed
economy on course for growth [next to Japan],
assuming the best outcome. It is by far the largest single country economy and
can therefore “lead”. Most investment money is USD in the US. It can make - or
break - a market when it flows.
How big is US economy really?
 |
| Source: Wikipedia, data of 2012 |
USA economy - big enough to go it alone?
Being the world’s largest, means US consumers are hugely
important: If ‘locals’ buy a lot, many detrimental outside influences can be
mitigated.
However, if the ‘other’ economy (viewing Europe as one
integrated market for example) is as big as that of the US and also a major trading partner,
then its influence is less negotiable.
The US imports EU goods at a deflated
EUR. That means Europe can gain the pricing power, and increase corporate
profits for European companies. Over time these profits will feed the EUR, and as the currency gains strength, gradually reduce the price advantage.
 |
| Source: Wikipedia, based on 2012 data |
”The bull case for US equities is easy to make!” to quote from the January 2015 report, by Canaccord
Genuity, London.
Can America go it alone? Turn all detrimental influences to their advantage? Flag-wavers believe, they can, and will not
succumb to outside pressures.
Flags may change, yet America carries on dreaming…
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