A recent stateside research trip provided me with the opportunity to reflect and garner some direct insight into the health of the US economy and stockmarket.
It seems like almost an eternity ago that dysfunctional US politics threatened to derail the US economy and the superpower stared down the barrel of the ‘fiscal cliff’. It was only just over a year ago.
It also seems like an eternity ago that Democrats and Republicans caused the first US government shutdown in 17 years. Yet that was only six months ago.
And when you factor in one of the worst winters on record in the US – February of 2014 was the fourth coldest since records began, according to the National Weather Service in La Crosse – the resilience of the US economy is quite staggering. Equity markets have also shrugged off these challenges to breach all-time highs.
So what has been behind the strength – and can it be sustained? On the economic side, the continued loose monetary policy provided by the Federal Reserve has gone a significant way to offsetting the political and fiscal headwinds.
And even though the act of ‘tapering’ has begun, with the clear intention of winding down the extensive quantitative easing programme, this merely signals the underlying strength in the economy.
The arrival of Janet Yellen at the helm changes little of the overall dynamic of the Fed in our opinion, as the course set by departing chair Ben Bernanke is likely to be followed through.
A clear economic boon has been the resurgence of the US energy sector, which has re-energised industry already benefiting from a repaired banking system, a recovering housing market and an improving employment outlook, as previously lost manufacturing jobs return onshore. According to analysis from Citigroup, the shale gas and oil boom under way is set to see the US become self-sufficient by 2020, if not before.
Economics and equity market performance are not synonymous, though.
The undercurrent to last year’s strong stockmarket performance was that it was not primarily driven by earnings growth but rather multiple expansion, as investors willingly paid higher prices to get on board.
Some of this came in the form of share buybacks and merger and acquisition activity, which many perceive to be tantamount to financial engineering.
However, if confidence is kept high as a result, the cycle can become self-reinforcing and a genuine improvement in corporate earnings could follow.
This will be the real test, as companies demonstrate an ability or otherwise to convert this opportunity into profits. In this respect the jury is still out, but corporate optimism is high, and that became clear across a series of meetings with various investors.
There are always concerns, and it is prudent to take nothing for granted. As the market price has reached record levels, this prudence leads us to trim our exposure for now. We will, of course, continue to closely monitor this view.
Aidan Kearney is co-head of Aberdeen’s multi-manager team
