The continuing strength of the US market will come under pressure from inflationary factors, although...
Emerging from the deflationary emerging markets crisis, the US economic fundamentals are looking good.
Rupert Della Porta, investment director of US equities at Hill Samuel Asset Management, says: "There are pretty high valuations in the US this year, but we are entering the longest period of expansion in the post-war period.
"There is still a legacy of low inflation and a robust growth in the economy and Greenspan has been nominated for another four years with no real likelihood of his appointment being opposed.
"The Asian and Russian crises led to a deflation situation. We are through that and are going from deflation to inflation, so risks to inflation are on the upside. The risk is that the market will get over-anxious."
Inflationary pressures include the high price of oil which is filtering through to prices generally. On the other side of the equation, generous bonuses are being paid. In the past, dropping unemployment has been associated with rising inflation and there is not enough immigration to prevent the low US unemployment rate of 4.1% from pushing wages up.
Indeed, wage inflation has already started but is being offset by productivity increases.
In the last 25 years, the appropriation of new technology in communications and computers has allowed productivity increases, but only in certain specialised markets. In the last 10 years, this benefit has become widespread.
Grant Wilson, director of the North American equity team at Martin Currie, says: "Communications and computers have helped labour productivity outside the usual areas.
"White-collar workers have increased productivity in the last decade and may continue to for the next 10 years. This would sink the 'here comes inflation' scenario."
Inflationary tendencies, however, will be built into the economy for some time. Della Porta puts inflation at 2.4% for 2000.
Consumers gained a lot from a recent rash of mortgage refinancing. That was something of a one-time gain and there should be cooling off towards the second half of the year.
The market is heavily weighted towards the highly-valued tech stocks. The average P/E ratio is 28, whereas the median is 16, indicating that a large proportion of stocks are running at normal levels, a fact not necessarily represented in an index.
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