Back in April and May the outlook was very bleak. Economic data was telling us all what we feared mo...
Back in April and May the outlook was very bleak. Economic data was telling us all what we feared most. The great US economic miracle was succumbing to that post-war plague of inflation.
It looked as if the bull market was coming to a sticky end and with all the excitement and enthusiasm for the new economy evaporating fast. Last year's darlings were becoming the scourge of every portfolio and there was a realisation that it had all gone too far. Clearly the market had got over cooked and fear and greed had a nasty sting in the tail.
The economic data has improved over the last six weeks and it would now seem that the 175bp increase in interest rates over the last year is having some effect in slowing growth.
The truth lies in between somewhere. Greenspan's comments are as opaque and as balanced as ever. But reading between the lines he is saying the job of the FOMC is to be vigilant and to act quickly to stem imbalances.
What is not clear is what direction rates will move. We believe that inflation is not about to flare up and that in fact the threat of disinflation is greater. The great powerhouse of economic growth, the US, is showing signs of slowdown.
There are three cornerstones to our strategy, namely the macroeconomic background, the earnings outlook for the market as a whole and the dynamics of individual stocks.
The benign economic background outlined above bodes well for financial assets, both bonds and equities. The fundamentals for equities are good. We are in the midst of the Q2 reporting season. Although there was a clutch of negative pre-announcements the bulk of results are coming in ahead of expectations.
The market response is reasonably muted. There is little evidence of the extreme euphoria of the fourth quarter results or the almost glass is half empty response to the first quarter results. Earnings estimates are being revised up and for this year it is likely that earnings growth will be around 18% and approximately 15% for next year. The shape of the earnings certainly favours technology for its secular growth characteristics and energy, particularly gas and services for their cyclical earnings.
The third cornerstone is liquidity. According to a number of Wall Street strategists institutional liquidity is high and at the same level as during the credit crisis of September 1998. This money needs to find a home especially as mutual fund inflows are still strong.
Although there are risks to the market such as interest rates and inflation we feel on balance that the fundamentals are good. The three cornerstones of soft landing, strong earnings and liquidity continue to make the US market an attractive proposition.
David Currie is a fund manager at Edinburgh Fund Managers
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