One of the biggest challenges for investors is to remain ahead of the curve, to anticipate changes rather than react to them after the event. It is much easier said than done because stock markets are forward-looking while the news agenda is at best focused on the here and now and at worst looking in the rear-view mirror.
The chart below shows how quickly shifts in market leadership can take place. Since the beginning of the year, the US market has continued to move ahead, reaching a new all-time high earlier this week, but it has been easily outpaced by the other main benchmarks in the UK, Europe and Japan.
Investors who have got used to America leading the pack are starting to ask themselves whether they should be reassessing their asset allocation.
Later today, the latest non-farm payroll numbers will confirm that the US jobs market is enjoying a robust recovery but other data has been more mixed. In particular, expectations are rising that American companies may be poised to record two consecutive quarters of declining profits as lower energy prices and a stronger dollar weigh on earnings in the first half of 2015.
With the S&P 500 at or close to a record high, and the Nasdaq index of mainly technology stocks rising above 5,000 for the first time since the dot.com bubble, questions are starting to be asked about whether the US market has gone too far since its remarkable rally began in 2009.
Economies and markets are self-regulating to an extent. With the dollar strengthening against most major currencies (the euro and yen in particular), American companies are finding it increasingly difficult to remain competitive. And they are beginning to complain about the currency headwind in their results announcements.
By contrast, European companies are starting to enjoy the attractive cocktail of a cheaper currency, cheaper energy costs and, from next week, plenty of new liquidity sloshing through the financial system. In Japan, corporate earnings are growing fast, once again on the back of a more competitive currency.
With stock market valuations higher in the US than in other developed markets, and monetary policy pointing to even more dollar strength, it is unsurprising that some investors are trimming their US positions.
I’m still happy to hold America in a diversified portfolio, but I’m reining back a bit on my enthusiasm for the US market to a neutral position. Here’s why:
First, the interest rate differential may turn out to be less than investors fear if corporate earnings and the stock market start to sag. The Fed has made it clear that it will be driven by the data when it comes to interest rate hikes this year. As we experienced over here, expectations of a rate hike in 2014 quickly shifted back to 2016. The same might happen in America.
Second, it would be wrong to underestimate the positive impact of cheaper oil on the US consumer. With a lot of energy companies in its index, the US market will be hit in the short term by a lower oil price but this will be offset by bigger profits at companies exposed to rising consumer confidence.
Third, the impact of $140bn a month of money printing should not be dismissed. That’s the total being created by the Bank of Japan and European Central Bank from next week and it can only be expected to deepen the distortions in global financial markets. Asset prices will rise across the board in such an accommodative environment and, while Europe and Japan may be hotter stories right now, the US will also benefit.
As at 5th March
|Japan (Nikkei 225)||3.1||-9.9||23.8||26.8||25.3|
|US (S&P 500)||16.0||1.7||14.7||21.8||11.9|
|Europe (STOXX Europe 600)||9.6||-8.3||13.5||15.0||17.1|
|UK (FTSE 100)||7.0||-3.7||11.5||5.6||2.4|
Past performance is not a guide to future returns
Source: Datastream from 5.3.10 to 5.3.15, in local currency terms.
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