Monday 23 October 2017

US stock market record-breaking run could keep going

The S&P 500 rose 0.9 percent last week to end at another record high, and many analysts think it can go even higher.

The S&P 500 rose 0.5 percent on Friday on hopes of tax cuts and Doug Gordon, senior portfolio manager at Russell Investments, thinks that tax reform in the US could keep the bull market going.

“I don't think we have it fully priced in as of yet,” Gordon told CNBC last week referring to the tax reform.

Gordon suggested that non-US developed equities “look modestly more attractive” than US equity markets.

However, sounding a cautionary note, Gordon said that the market has moved into the late stages of the bull run and that the market “could get those irrational exuberance kind of moments” but “I don't think we're quite there yet”.

Indeed, most analysts remain optimistic.

“We are getting more calls from our clients asking us whether they should sell their stocks rather than buy them, because they are scared. This is not what you normally see at market tops,” noted Maris Ogg, president at Tower Bridge Advisors, who thinks that the market could continue to climb for another couple of years.

Meanwhile, Bespoke Investment Group noted that “2017 is tied for the fifth most closing highs on record, dating back to 1929” and that “there’s the potential for more”.

Still Ogg did warn that there is risk of a sudden drop in profit margins. While net profit margin was 9.5 percent in the third quarter and close to a record high, Ogg sees wage pressure “building up”.

Indeed, John Hussman, President of Hussman Investment Trust, warned in a recent article that “the process of profit margin normalization is already underway”, driven by a low unemployment rate and the demographic constraint of a slow-growing labour force.

Without the boost from a rising profit margin and with valuation already “2.75 times their historical norms”, Hussman warned that “the S&P 500 is likely to post negative total returns over the coming 10-12 year horizon, with a likely interim loss in excess of -60%”.

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