What’s powering the US markets?
The US, as you can imagine is the leading economy based on size and volume and today, the S&P 500
share index, which tracks the 500 biggest public sector companies in America is set to have gone 3,453
days without falling 20% or more, which markets the longest rally ever in US history. The big names
which we are familiar with, such as Facebook are driving these gains. Technology firms are driving the
growth and these firms represent around 12-13% of market cap (on the S&P index) but have
accounted for about 40% of the gains. This just puts it into perspective how big some of these firms
are and how far they are taking the US indices. Whilst some of these shares in companies may be
slightly overvalued, we don’t see parallels with the late 1990s prior to the dotcom crash, as company
earnings have also been growing fast. If today the S&P closes higher when the US market closes at
21:00 GMT, this could post the longest bull run in history. US stocks are being pushed higher and
higher thanks to strong corporate earnings results and health economy growth. with the trade talks
expected to not go anywhere this week, it is helping stocks edge higher, both in the US and globally.
We are not going defensive… yet!
The US data continues to look strong, with expectations that the states will grow by 3% annualised
this year. This growth trajectory means that this will lead most of the growth throughout the world
for the remainder of 2018. Whilst we remain on this course, we need to continue to watch the core
economic fundamentals on a daily basis to ensure that we do not miss out on when the data actually
starts to slowdown.
The main things to note when looking at the US economy is that the economic data is strong and whilst
it is strong and on track record of reaching 3% annualised growth for the year, we will continue to see
the rest of the world follow the trajectory. As long as we have a short-term opportunity that becomes
a medium-term threat, as long as global growth and data continues to remain strong, and the US 10-
year yield remains at current levels, we will then remain invested.
The US 10-year yield is an important indicator as the yields on the bonds are paid to the US
government as interest for borrowing money via selling the bond. The ten-year is used as a proxy for
many other important financial matters, such as mortgage rates which shows why its current level is
a key indicator to showing overall resilience of the US economy. This bond also tends to signal
investors’ confidence when the confidence is high, then the ten-year bonds price drops and yields go
higher because investors feel that they can find higher returning investments and don’t feel that they
need to play safe. This is therefore a good way of seeing what investors sentiment is like and as long
as we remain around the current levels, we remain in a safe place and remain invested.
By looking at the various barometers we look at, we are constantly watching the economic data to
determine where we are in the economic curve. Yes, the million-dollar question always stands as to
where should we be invested and why? It is difficult to predict macroeconomic variables like GDP
growth; however, economists use models to gauge where we are in the economic cycle. By predicting
these key variables, such as growth, interest rates and inflation or, more importantly, the changes in
those variables is extremely difficult. This is the reason why our asset allocation process also relies on
bottom-up asset class valuations when we do our fund research and how we pick the securities we
choose to be invested in within the OBI models. Businesses are not immune to changes in the macro
environment and that, in the short term at least, macro does matter. If GDP growth surprises to the
downside, company sales are likely to be lower thereby pushing the market price lower. Equally, if
inflation is higher than expected, the squeeze on real incomes is likely to have a similar effect by
reducing consumer discretionary spending.
For anyone who wants further data to substantiate the position please review the attached Global
Economic News Document.
Model Portfolios & Indices
Over the last week we have seen most of the indices that we track deliver mixed messages, however
the ones to focus on are the US main indices. As highlighted above, the S&P 500 has reached record
highs and continues to reach new heights. We have seen strong gains on the DOW which is leading
growth in the rest of the world. Asia’s main stock markets climbed on when they closed today, which
again is mostly due to the boost by Wall Street’s rise. Things seem to have calm down slightly with
volatility as the US has said it will take the tariff discussions with China (which is down 17.47% YTD as
it keeps getting worse) and its other trading partners a bit more slightly. Asian investors had taken
some comfort from hopes that trade negotiations between the US and China this week could help to
diffuse trade tensions. Political headlines in the US and Australia and a retreat in Chinese markets
dampened the mood. Within Europe, the main stock markets are all in different places in today’s
trading hours, and this is mostly due to the instabilities in the US, being pushed higher by strong
corporate earnings and economic data but being pushed down by politics and Trump!
Our model portfolios have held up well over the past week, outperforming their respective
benchmarks as well as performing in line with the indices. Based on the strong mandate of OBI and
the ability to cyclically adjust the portfolios based on the stage of the economic cycle, we are able to
provide constant returns with the capital preservation mandate in mind. As we progress through this
year, we will continue to monitor the economic data and will alter the asset allocation when the core
fundamentals start to slow down. This further adds to the comment over how important it is to keep
watching the economic data and identifying slowdowns, and when they happen.
Upcoming Investment Committee Meeting
We intend to hold the next investment committee meeting at the start of September, and in these
meetings, we look at the markets, our positioning as well as market opportunities moving forward, by
doing a full top-down analysis on the world and the economic data. We continue to remain invested
as the data and fundamentals suggest that we shouldn’t be worried about an imminent correction.
The Investment Committee Meeting will therefore help us determine the current state and where we
are in the economic cycle and therefore when we should start thinking about our model portfolios
and adjusting our strategies, which will be the shift from adopting a normalised approach to a more
defensive asset allocation approach.
Important Information
The data above will not directly correlate to the indices as there is always a delay in pricing because the US
markets close significantly later than the European markets and the Asian markets. The data set above reflects
the last close and much of the days movements will not yet be reflected in the portfolios due to pricing delays.
You cannot therefore directly correlate indices to the portfolios. The value of investments may fluctuate in
price or value and you may get back less than the amount originally invested. Past performance is not a
guarantee of future performance. Performance figures quoted include the fund manager charges but exclude
other fees such as adviser, custodian, switch and/or discretionary investment management fees. Unless
otherwise instructed and accrued, income is reinvested into the portfolio.
This Day in History
On this day in 1902, the infamous and ultimate US cool car, Cadillac was founded. Named for the man
who founded Detroit in 1801, Antoine Laumet de La Mothe Cadillac, Michigan’s newest car company
launches. The Cadillac Automobile Company rises from the ashes of the Henry Ford Company, after
Ford leaves his company over a squabble with investors.
As always have a wonderful week and stay safe.
VBW
Jason
