Is the US bull market on its last legs?

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Irregularities of the current economic cycle and ongoing geopolitical events make for cloudy navigation as investors try to anticipate what’s to come in 2020.

If the US economy loses the momentum that has seen its market rise for more than 10 straight years – the longest bull run in its history1 - where will investors turn next? Two scenarios could play out as investors decide whether to be more defensive or risk-on in the year ahead, according to Paul Markham, Newton global equity portfolio manager.

“We may see overall indices shift towards a more market-driven cyclical rally, which could give the overall market more legs,” Markham says. “But if we don’t see that happen, investors may retreat back to reliable earnings streams and potentially steadier dividend yield.”

If the latter takes place, it could mean the US is less likely to maintain the “goldilocks” environment representative of the past decade, according to Markham. Additionally, if investors gravitate towards dividend-paying stocks, certain sectors may fare better than others.

“US investors like top-line growth rather than bottom-line growth and that’s something that will be difficult for certain sectors, although US healthcare may potentially be a good option in that environment,” Markham says.

As for the data, economic indicators are somewhat mixed, which could make it difficult to predict whether investors will opt for the cyclical route or the defensive play. The US Federal Reserve anticipates that while the US should keep growing, it will do so more slowly. In its most recent forecast, it said US GDP2 growth should slow from 2.2% in 2019 to 2.0% in 2020; and 1.9% in 2021 followed by 1.8% in 2022.3 This outlook, paired with an expected slightly lower unemployment rate in 2020 of 3.5% and modest rise in core inflation to 1.9%, signals slow but persistent growth going forward.

Despite this, the key indicator for whether or not this expansion still has legs may be corporate earnings, according to Markham.

“Although traditionally equity markets have tended to lead economies, the lag effect has been significantly wider since the financial crisis and for some years the market ran far ahead of economic growth, driven primarily by aggressive monetary stimulus,” Markham says. “That gives the feeling the market is dragging along a reluctant economy and steadily rerating, and that’s something we haven’t seen before.”

“How this transpires in the event earnings don’t catch up is going to be really important and interesting to see; and could eventually lead to some potential market vulnerability,” Markham says.

1 Investopedia: Market milestones as the bull market turns 10, October 16, 2019

2 Gross Domestic Product

3 Chair's FOMC Press Conference Projections Materials, December 11, 2019

 

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