No rush on cheap US stocks

After its worst end to a year since the Great Depression, Wall Street is suddenly a bargain.

The S&P 500’s forward priceearnings ratio – a gauge of a stock’s value against analysts’ earnings forecasts – indicates that US stocks have not been this cheap in four years.

Another, the price-earnings to growth ratio, suggests that only in the depths of the financial crisis could investors snap up cheaper stock.

But investors are reluctant to sink their money into the dying bull run as the curtain falls on a miserable year.

Financial markets and the indicators tracking the global economy point to two very different paths for 2019.

The former predicts a sudden end to a decade of expansion while the latter has the brakes being gently tapped as the economy shifts from top gear.

Final figures are expected to show that the US economy racked up its joint-strongest growth in 2018 since before the crisis, but global stocks have suffered their worst year since 2008.

Top financial institutions, such as the IMF and OECD, predicted only moderating growth in the coming years but the Treasury yield curve is on the brink of a dreaded inversion – the market’s favourite recession indicator.

A poll of economists by Bloomberg places just a 20% and 16.5% probability of recession within the next 12 months in the US and eurozone respectively, but a staggering 93% of a wide-ranging basket of assets have lost value in dollar terms in 2018’s rout – a record, according to Deutsche Bank.

What do markets fear that policymakers do not?

“If you look at the fundamentals, the world is not in such a bad place as some would have you believe,” says David Riley, strategist at BlueBay.

“When we came into this final quarter, the market had built up a wall of worry.” Those risks are now fading, he argues.

Donald Trump boasted last week that a 90-day ceasefire in the trade war had resulted in “big progress” in talks with China. Italy has struck a budget deal to appease its EU overlords, Beijing has announced stimulus packages to battle its slowdown and the Fed has laid the groundwork for a pause in its interest rate hikes this year, easing the pressure on companies.

But those simmering risks are only a rogue tweet, or policy misstep, from boiling over.

“When you look at how far markets have fallen, the valuations on growth-sensitive assets – like equities, credit and emerging markets – are almost starting to price in a deflationary slump in the global economy and I don’t really see that. There is real value to be had there,” he adds.

Growth worries are “filling a narrative to the sell-off”, rattling markets, but the “big downside risk is a re-escalation in the trade war and a hard landing in China”, Riley says.

“Our recession probability model has no false positives, but we know the economy slows sometimes without going into outright recession,” warned Pierre Lafourcade, an economist at UBS.

He added that data from 120 recessions over the past 40 years and 40 countries was not consistent with this economy being “late cycle”.

“But bad things happen to good economies, ” Lafourcade says.

“There are always shocks that models will not see.”

UBS warned another oil price crash could be that “shock” for the US economy, arguing that a further fall in the price of crude that put it into a bear market of around $40 per barrel would increase the probability of a recession. –

Those simmering risks are a rogue tweet, or policy misstep, from boiling over