The US market has now discounted much of the bad news about the economy, said Richard Wastcoat, mana...
The US market has now discounted much of the bad news about the economy, said Richard Wastcoat, managing director of Fidelity's businesses in the UK, Spain and the Nordic region, however it still looks expensive compared to historical levels.
Fidelity, which recently replaced John Muresianu with Sheil on the Fidelity American fund, sees earnings having bottomed and beginning to rise.
With such low levels of inflation and interest rates these levels may not, however, be unjustified. Wastcoat said: 'The overall P/E ratio of the S&P 500 Index moved from under 10 to almost 30 between January 1982 and August 2002. However, looking at the low returns available on other asset classes ' for example 5-year treasury bill yields ' these higher P/E ratios appear to have some justification because of low interest rates.'
'On the basis of current interest rates, P/E's of 20-25 and above would be easily supported,' he concluded.
The key to the market remains earnings, however. 'The positives are that there is a tremendous amount of monetary and fiscal stimulus going on in the US economy. Productivity is increasing and there is reasonable inventory build underway.'
'The obvious negatives on earnings are the lack of faith in the accounting system, and pricing power, which is weak.
But, he said there are signs that earnings growth may have begun to turn up again, which is welcome, he said because: 'In the long run, stock prices follow earnings. It's not perfect but the correlation is something like 96%.'
He said: 'From their peak, the Nasdaq, which is full of TMT stocks, is down 75% versus the much broader S&P 500, which is down 47%. To put this in perspective, only six times in the last 100 years has the US market declined more than 40%.'
He said the first in 1968-1970, in which the S&P declined 36%, was caused by recession and lasted 543 days.
The second was 1973-1974, where the S&P declined 48% primarily due to the energy crisis and inflation lasting 651 days. The 1990 bear market was relatively modest by comparison declining 20%, driven by a real estate crisis. It lasted 87 days.
'So on a magnitude and length basis, the current bear market is among the worst ever,' he said.
He said: 'Today's environment is very different for US companies. Many managers have been trained to deal with high inflation environments and not since the 50's and early 60's have we seen managers challenged in an environment such as we face today. On the positive side, the US consumer, buoyed by a healthy product market, has remained resilient.
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