Eddy Redmayne, Julianne Moore, JK Simmons, Birdman (and therefore Alejandro Gonzalez Inarritu as its director) and Patricia Arquette were odds-on Oscar winners.
With something as subjective as the world of films, there are as many opinions as commentators but realistically only Benedict Cumberbatch and Boyhood in the Best Film category (and therefore its director Richard Linklater) could have a mild grumble.
If you get economists or strategists or portfolio managers involved in our own investment world, you get a similar number of opinions on issues, none more so right now than where next for US equities.
What goes up…
The US is having a barn-storming 2015 and, with the obvious caveat of some totally left-field, seismic shock that nobody can see coming from anywhere actually coming, indications are that US equities still look like a good place to invest.
Jim Wood-Smith, head of research at Hawksmoor Investment Management, gave us all a quick run-through yesterday morning, commenting that the S&P 500 (above 2,100) and the Dow Jones (18,100) both finished last week at their highest ever levels; the Nasdaq Composite, at just shy of 5,000, is almost back to its dotcom peak.
Wood-Smith asks the obvious question given any record high or low: “It is only one extreme that can lead to another. Markets face the same question now as they have for at least the past year: how high can valuations go before it becomes inevitable that the only way is down?”
Looking at another S&P 500 measure, the Shiller P/E is also close to its own record level, at 27.72, that has only been higher in 1929, 2000 and 2008 – three years that would ordinarily put the fear of whoever is their god into any investor.
Alastair Winter, chief economist at investment bank Daniel Stewart, adds: “As you might expect, there seem to be more opinions than commentators but the one thing on which there is a scary unanimity is that equity markets are seriously over-valued and a day of reckoning will sure come. Beyond that, views diverge on the causes and extent of the over-valuations and over what will be the triggers of any corrections.”
One of those whose opinions differs to Winter’s is Wood-Smith himself, commenting: “Unless one subscribes to the doomsday economic scenario, the lack of viable alternatives is making it appear that equity valuations must keep rising. While cash and bond returns of zip, or even less than zip, prevail, equity yields look extraordinarily attractive.”
Rate-rise timing vital
His start point is the rest of the world follows the S&P 500, quoting Factset’s numbers that its 12-month forward P/E ratio has risen to 17.1, up from 16.2 at the start of 2015, that compares to an average rating for the past five years of 13.6, 14.1 for the past 20 years, and 16 for the past 15 years.
His conclusion? The US equity market is on average “slightly expensive”, adding: “It is not dangerously so and should be a long way away from my feared ‘extreme’.”
Another expert view came from David Stubbs, global market strategist at JP Morgan Asset Management who assessed the equity and bond market outlook given Fed Chair Janet Yellen’s comments last week.
Investors, he says, are still looking for definitive signs of when she will move interest rates rather than sitting back and reacting whenever she does add the first increase rate hike since the end of 2009.
At its most recent meeting, the Federal Open Market Committee discussed whether raising rates sooner or later would have the most beneficial impact saying that doing so too soon could hamper the US economic recovery.
Stubbs’ comments are littered with statements such as: “Overall the jobs market has improved, but uncertainty remains” and “She [Yellen] will be looking not just at the quantity of US jobs growth but also at the quality of jobs being created”.
His own conclusion is: “The current strength of the US dollar will make it hard for the Fed to tighten unless they are completely sure of the strength of the underlying economy.” Ultimately, he says, the Fed is more likely to raise rates once consumers start spending and this is unlikely while there is so much uncertainty.
Challenge the market
According to Stubbs: “The big picture for US equities is that they can go up on a multi-year view, but investors should be realistic about returns at these levels, which are likely to be mid-single digit total returns at best.”
The end result of all this is that the bullish story around the US stock market remains, but investors should expect returns in single rather than double digits.
There are, I think, two US investment themes to be looked at closely now for the year ahead: whether or not to follow an index (and, if so, which one) and, if large caps look better value than small caps (given their relative lack of sensitivity when interest rates do rise), will their exposure to the rising fortunes of the global economy be hindered by an increasingly strong dollar?
Unless the doomsday scenario does appear – when we will have plenty of other things to worry about – the year ahead looks like a good one for US equity investors.
