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The runaway train that is the US stock market is still moving so fast that some investors wonder if they can jump on without breaking a limb.
It's a difficult maneuver. As major markets wait for a long weekend, the S&P 500 index of major US stocks closed the first quarter of this year with a gain of 10 percent, on top of an 11 percent rise in the fourth quarter of 2019. Last year.
A few European indices, such as Germany's DAX and Italy's FTSE MIB, can match or even surpass this in local currency terms, and Japan remains in action. Even the UK's FTSE 100 index is approaching its record high, with all the grace of Mr. Bean skating on ice, in a force 10 storm, carrying two bowls of custard, in the dark. A win is a win, but at roughly 3 percent, the first-quarter gains there are more modest.
But the scale of the US rise and the sheer weight of market capitalization behind it (Apple alone is twice the size of the DAX, for example) means that this is what matters. It seems unstoppable.
Goldman Sachs even charts a plausible path for the S&P 500 to reach a high of 6,000 points, about 14 per cent higher than it is now, if “mega-exceptions” continue unabated. This is not the bank's base case, but with its 5,200 target for the year already in the rearview mirror, chief US equity strategist David Kostin is positioning this as a potential framework for super-scalpers.
“The weirdness continues,” said Andrew Pease, chief investment strategist at Russell Investments in London. “The way things turned out is weird.” The sudden shift in market expectations around interest rate cuts by the Federal Reserve – from six cuts priced in at the start of the year to three now – failed to make an impact on stock market performance.
Money managers who had a more pessimistic view of where markets were headed were increasingly giving in and jumping ahead — all of which unnerved those who wondered whether this had gone too far, Pease said. But as for his long-term focus, with many pension fund clients, he is not complaining loudly enough to demand action. “It's hard to have a strong point of view right now,” he said.
“This will end either when the last bear gets dragged, which has not happened yet, or when the market gets shocked by some piece of information – and that could take some time.”
This sentiment also comes from Edmond de Rothschild Asset Management in France, which recently trimmed its equity exposure to slightly underweight compared to benchmarks. “This was not a risk-reduction emergency,” said Benjamin Millman, chief investment officer at the family-owned group. But he is puzzled by the market's willingness to ignore signs of rising US inflation, and concerned about what he called a “champagne environment” dominated by an angry belief in American exceptionalism.
“U.S. investors are convinced that the U.S. technology sector cannot be challenged,” said his colleague Jacques Aurelien Marcero, who has been covering global technology for 15 years. “European investors are more afraid.”
So the dilemma is very clear. Investors – professional or individual – can either decide that the trend is their friend, and stick with something their instinct says looks like a stretch, or they can make a heroically contrarian decision that the rally is about to end and bet on a decline. The latter is a particularly painful bet if you make a mistake.
One investment firm that knows this feeling is GMO, famous for its years of warnings of a “meat grinder” crash heading into US stocks. Now, Ben Enker, co-head of asset allocation there, declares there is “a lot we're excited about,” but not in popular places.
“It's harder and harder to get excited about owning the S&P 500 because of how well that index is doing and how high the valuations are,” he said. “There's no guarantee that US giant cap stocks are going to go down tomorrow, it's just that when you look at it, we think you're not seeing really good returns from here.” Instead, he is looking at “deep value” stocks in Europe and elsewhere, which he believes offer some amazing opportunities.
As Enker admits, if large-cap US stocks fall for whatever reason, the cheaper parts of the global stock market will fall as well. So, to some extent, these are two sides of the same coin.
All of this means that, especially with the US first-quarter earnings season approaching in April, investors are entering a sensitive phase. “Big asset managers don't say 'I'm king of the world' and spread money everywhere,” said Alain Bokobza, head of global asset allocation at French bank Société Générale. “They are still strict and disciplined.” He said that all roads still lead to the United States. The index is believed to head towards 5,500 if the macro environment remains broadly stable and bond markets remain nice and calm.
But he said the continued rally in US stocks is “dangerous” because it represents an entrenched consensus trade. “If you stick with it, you're not being careful, so it's a matter of when you activate the risk reduction process. That's the art of asset allocation.”
katie.martin@ft.com
