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The Dow continues its long-running winning streak and US Markets are grasping at all-time-highs. But are we nearing the end of the bull-run on US markets?
I was asked this very question just this week in an interview on Australia's Sky Business channel. As we hover around key short-term price targets, the expectant risk is more and more apparent. Every single trading session this week has seen markets come within a whisker of records, only to fall short before breaking into new territory. While this may be seen as short-term resistance, a larger, more complex road block lies ahead.
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Much depends on domestic demand and we've seen tremendous growth in the year-to-date. The Dow is back at pre-GFC levels but there is still a lot of risk in this market. Shockwaves from the GFC are still being felt by many investors but isn't reflected in the current valuations of companies around the world. In fact, judging by most US stock valuations, one could be forgiven for thinking that the Global Financial Crisis never happened! This ‘over-valuation’ means short-term risk remains a very real prospect. Most US stocks are bullishly priced, especially considering the most recent sequestration measures rolled on 1 March. The initial rhetoric was that sequestration had little impact on the buoyant markets. The fact is that the impacts from these major spending cuts will not be felt for several months and could last for several years.
What about the US dollar?
The current 'value' of the discounted US dollar does not appear to be factored into market performance. The lower dollar is making US products and services more attractive to international buyers. With the dollar now some 30% lower than in recent years, US products are effectively being offered at a major historical discount. The rebounding economy and evaporation of quantitative easing mean the dollar can only head north, which will likely have a major impact on the viability of US products for international consumers.
Sequestration impacts will definitely be felt in America and states that rely on the military ‘industry’ may feel the most pain. $85 billion in military spending cuts will affect state revenues, a range of industries and consumer spending.
It’s not all bad
Investors can take confidence from the fact that the US economy hasn't been affected by ‘fiscal cliff’ ramifications. In fact, recent tax hikes for consumers in America barely made a dent in retail spending. Foreclosure rates are falling and even spending on luxury items like new cars is booming. Rising house prices are slowly rebuilding equity for home owners, which is not only improving consumer spending but is also a very positive sign that this economy means business.
America is well positioned to grow. The dollar remains of huge benefit to production and exports and quantitative easing has helped to spur underlying growth.
Leading US indices are factoring in an excellent economic outlook based on share market performance and economic indicators. Whether they have adequately factored in the prospect of a delayed strain on the economy due to sequestration measures and fiscal ramifications is moot. The long-term outlook appears positive but immediate hurdles may well prove higher than anticipated.
For that reason I wouldn't be surprised to see a medium-term pullback so the market can absorb the recent gains. While we should accept that the US economy is doing better, we should not forget that the lower US dollar and record-low interest rates are helping domestic productivity and competitiveness. I think the market is fully priced at the moment but 2013 will still be a positive year for economic growth in the US.
While both the US and Australia have more room to grow in 2013, some emerging markets have been beaten up pretty badly in the past year. Brazil continues to deal with a higher currency and inflation but underlying production is very promising. 2013 could be a record year for agriculture and Brazil may be the world's largest producer in a number of sectors, including Soya Beans. They have enormous export potential and the best infrastructure in the region and are well positioned for growth.
Keeping an eye on the ball,
Lachlan McPherson
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