The US bull market is alive and well, with the S&P 500 hitting more all-time highs last week, but things have been nowhere nearly as rosy in Europe, Asia and emerging markets. Is it time for non-US indices to enjoy some relative strength, or will the US continue to lead the way? Investors think the latter is more likely, judging by Merrill Lynch’s fund manager survey for August, which found record-high sentiment regarding the outlook for US profits and the biggest overweight position in US stocks since early 2015. In contrast, Nautilus Research data, which examined previous occasions mirroring the current environment, suggest a relative near-term bounce for European stocks may be more likely. Prognostications aside, the extent of the recent divergence is remarkable. Recent Bespoke Investment data showed 16 of 22 major national markets were in downtrends, with only two non-US markets in uptrends. The S&P 500’s recent outperformance coupled with dollar strength means the US market now accounts for more than 40 per cent of global stock market capitalisation for the first time since 2005, Bespoke noted last week. Japan and China are jostling for second place, both countries accounting for 7.5 per cent, with Hong Kong, Britain, France and Germany lagging further behind. A decade ago, the US accounted for 32 per cent of the global market. By the time of Donald Trump’s election in November 2016, that figure had increased to 36.5 per cent, and the trend has since accelerated. Contrarians could be forgiven for giving up on a trend reversal, given just how long the current run of US outperformance has lasted.
Respect the market breakout
While US indices can’t outperform forever, the recent breakout to all-time highs suggests the bull market is alive and well. Technicians often claim it’s bullish when an index breaks out to new highs after consolidating for a long period. Such breakouts should be respected, the theory goes, as they indicate investors have digested and moved on from fundamental concerns (for example, rate hikes and trade tensions) that had been holding stocks in check.
As it happens, the data bears out this theory. Since 1950, notes LPL Research, there have been 18 times where the S&P 500 hit new highs for the first time in at least six months. A year later, stocks were higher on all but one occasion, averaging gains of 12.5 per cent. The longer investors grapple with a particular worry, the more its power recedes. For all the talk of damaging trade wars, markets have been increasingly calm in recent months, preferring to focus on bumper corporate profits. The decisive nature of the recent breakout means it’s wise to continue giving the bull market the benefit of the doubt.
A stock market at near capacity?
January’s stock market correction is fast becoming a distant memory and 2018 is now shaping up to be a good year for US indices, with the S&P 500 up 9 per cent year to date. However, some investors might be wondering: why haven’t stocks gained a lot more? After all, look at the positives. Bond yields have risen but remain low and
Federal Reserve
policy remains accommodative. Companies are buying back record levels of stock. Profit margins are at record highs. Earnings have soared 25 per cent and an extraordinary 80 per cent of companies – a record – have just surpassed quarterly profits estimates. Indeed, over the past one and two years, earnings have risen faster than the S&P 500. The problem, says the Leuthold Group’s
Jim Paulsen
, is after more than quadrupling over the last nine years, much of the S&P 500’s capacity for appreciation has been “used up”. Paulsen created a measure he describes as the stock market equivalent of capacity utilisation, one that looks at five measures – valuations, bond yields, profit margins, consumer confidence and unemployment. Right now, valuations are rich while the fundamentals are nearly too good, with the five indicators currently exceeding 80 per cent of all historical readings. This doesn’t mean stocks will fall or that a market peak is near, but past readings suggest returns over the next five- and 10-year periods will be much lower than usual, cautions Paulsen.
Time for daily earnings reports?
Donald Trump
recently asked US regulators to investigate whether it might make sense to do away with quarterly reporting and instead move to a twice-yearly reporting system. However, money manager and
Bloomberg
columnist
Barry Ritholtz
has a different – and intriguing – take on the matter. Twice-yearly reporting will make the event even more “momentous” and “overwhelmingly intense”, argues Ritholtz, with companies finding their stock price “shellacked” if they miss estimates. Instead, he suggests reporting earnings monthly. Over time, as technology improves, companies could move to near real-time daily updates. There’s too much hype over short-term earnings. The counterintuitive solution, says Ritholtz, is not less reporting, but more.
