The US stock market has been on a tear since it bottomed out after the 2008 global financial crisis, gaining more than 300% since early 2009. It has stubbornly defied those who have – increasingly urgently in the years of Donald Trump’s administration – warned of a looming crash, admittedly with the help of measures such as tax cuts.
The American president’s unpredictable approach has continued this year. Amid growing hope that US-China trade tensions were receding, fuelling a year-end rally to push the S&P 500 to a 28% gain for 2019, Trump struck again.
The US killing of Iranian general Qasem Soleimani in Iraq on January 3 sparked retaliation, with Iran firing missiles at American targets in Iraq. Yet, after a slight drop, US equities continued their upward march, as both sides appeared to back away from further escalation.
2020 is, unsurprisingly, widely tipped to provide another political rollercoaster ride – especially given the small matter of the upcoming presidential election in November.
But will we finally see the end of America’s mega-bull market this year, or more of the same?
AsianInvestor asked three investment experts for their views. Their responses have been edited for brevity and clarity.
Martyn Hole, investment director
US stocks seem due a correction, but there are several reasons why we remain positive on the market.
The two most important things are how the economy is doing and what’s happening to corporate earnings.
The manufacturing PMI [purchasing managers index] is fairly low, at 47.2 as of December, but manufacturing only accounts for around 15% of the US economy. Meanwhile, the services PMI is at 55 – and that represents a much bigger proportion of the economy. [A PMI reading above 50 represents an expansion when compared with the previous month, while a reading under 50 represents a contraction.]
In addition, the labour market is very tight, unemployment is low, wages are growing. The American economy is doing pretty well. We put the probability of a recession in the next 12 months at less than 20%.
I would agree that equity valuations are not particularly cheap, at 18 times prospective earnings. That is towards the top end of the range, but it is not outrageous.
And don’t forget that the stock market is giving a 2.3% yield, which is better than the 1.9% that 10-year US treasuries are offering now.
There are risks of course. One is that the slowdown in manufacturing could spread to the wider economy. And, from a geopolitical perspective, we’re probably not out of the woods as far as the US-China situation goes. Plus there are heightened tensions with Iran – though they seem to have been calmed for now.
The upshot is that we remain pretty fully invested in US stocks. In our global equity funds, we remain slightly underweight the US, at 53%, versus the 56% index weighting. That’s been the case for several years, partly because we’re slightly overweight European stocks, as we see them as cheaper than US equities.
Neil Dwane, portfolio manager and global strategist
Allianz Global Investors
The US stock market appears overvalued, trading at around 18 times earnings, and we don't expect much more upside in 2020, with no earnings growth as a possible recession looms. Meanwhile, non-US equities are around 20% to 40% cheaper, offer higher dividend yields and better earnings growth prospects, and may benefit from a softer dollar.
While the US has offered strong returns for many years now, the country will likely spend much of next year grappling with growing domestic political uncertainty.
Moreover, we believe rising geopolitical tensions from China and the Middle East, rapidly expanding government-borrowing deficits and the threat of more taxes and regulations from democratic candidates jeopardise the future performance of US markets.
And just as the hyper-partisan state of American politics reaches a fever pitch in the run-up to the 2020 election, political risks could be subsiding in other parts of the world. It might be the right time to diversify away from the US and take a look at investments elsewhere.
The European Union and UK, for instance, should benefit from the now-greater certainty around Brexit and signs of supportive fiscal stimulus in the UK and Germany.
And, while Asia is suffering from US-China trade tensions, there are opportunities to make great progress. The vibrant, youthful economies of India and Indonesia could lead the way, with governments focused on delivering much-needed reforms – to varying degrees of success so far.
Philipp Lisibach, senior investment strategist
For pretty much all of 2019 we’ve had an overweight position on US equities, and we retain that going into 2020. We don’t necessarily express that through broad S&P 500 exposure, but through specific pockets – we especially like the IT sector, particularly software.
That said, after a very strong end to 2019 for the S&P 500, we’re re-assessing our positioning, and looking at whether the US equity market still warrants an ‘outperform’ rating.
Nonetheless, we expect something like mid-single-digit earnings growth and 2% dividends, which would give broadly mid-single-digit (5% to 7%) total return expectations for 2020.
Obviously there is a huge event coming in 2020 in the form of the US presidential election, which will be a bit of an X factor; it could go in various directions as we approach crunch time.
That aside, fundamentals continue to be reasonable. Corporate earnings growth has a chance of showing some re-acceleration going into 2020. We also expect the economy, after a very sluggish 2019, to stabilise and potentially slightly accelerate.
That said, any tightening in monetary policy could be incredibly negative, given that much of what we have seen in terms of 2019 returns seem to be have been driven by easing of fiscal conditions. And that might come if inflation expectations were to surprise on the upside.