GREAT EXPECTATIONS DRIVE INVESTORS
Economy, US dollar, trade key to American stocks’ edge over equities elsewhere
THE ability of the United States stock market to keep an edge this year over equities elsewhere in the world hinges on the US maintaining its economic and earnings growth advantage, the strength of the US dollar and how global trade tensions resolve, said investors.
Spurred by fiscal policy benefits including a corporate tax cut, the US economy’s standout momentum relative to other regions had underpinned Wall Street’s advantage this year, they said.
“The outperformance of US stocks reflects not just earnings, but expectations about US economic growth versus other regions,” said Kristina Hooper, chief global market strategist at Invesco.
“Conventional investor wisdom is that the US is going to continue to outperform other economies this year and, hence, investors should move more of their exposure to the US.”
A clearer read of the US economy comes this week with data such as the government’s monthly employment report on Friday and quarterly results from more than 140 S&P 500 companies, including Apple.
According to an International Monetary Fund report this month, the US is projected to post economic growth of 2.9 per cent this year, up from 2.3 per cent last year, while European advanced economies, and Japan and China, have slower growth than a year ago.
The US economy grew 4.1 per cent in the second quarter, data last Friday showed, its fastest pace in nearly four years.
While returns for the US benchmark S&P 500 index trail last year’s — they are up six per cent so far this year against a 10.5 per cent gain at a similar point last year — US equities are easily beating indexes covering Europe, Japan and emerging markets after lagging or just keeping pace for all of last year.
“Returns themselves have been lower than many investors have come to expect. But on a relative basis, the US continues to be the market leader,” said Michael Arone, chief investment strategist at State Street Global Advisors.
Citi Research’s gauge on US economic data surprises was solidly positive in April and May, when its barometer for eurozone surprises was sharply negative.
“There was a change in expectation from synchronised global growth to US growth being better than the rest of the world really due to the fiscal tailwinds,” said Sunitha Thomas, regional portfolio manager for Northern Trust Wealth Management.
The US dollar surged against other major currencies starting in the second quarter, and investors said the greenback’s path would be an important factor determining relative equity performance.
The US dollar’s gains aided US equity fund returns against international funds, which required a costly translation into the greenback, said investors.
The US dollar’s strength weighed on emerging markets, where debt costs have increased and weaker currencies sparked an investor retreat. Emerging market stocks overall have particularly lagged this year, declining six per cent.
“All of these fundamental factors