Doubt on a number of fronts (Federal Reserve policy, trade conflicts, and economic development, just to name a few) pushed the S&P 500 to the edge of a bear market towards the end of 2018. Yet as those issues are in the process of being resolved generally in the favor of investors, there remains space for stocks to trade at even higher levels, according to Jonathan Golub, who serves as chief U.S. equity strategist at Credit Suisse.
According to Golub, “We’re not seeing stronger growth, but we are seeing a reduction in risk, and while everybody wants to see a powerful economy, that’s just not what’s fueling this thing.”
The foundation is much more secure today than it was only a few months ago. Market rates suggest a greater likelihood of an interest rate drop by the Federal Reserve this year than an increase. While a finalized decision is yet to be signed, the U.S.-China trade issue has come quite a ways from consecutive rounds of tariffs and counter-tariffs by the two biggest economies in the world. During the market’s gradual yet steady upward climb during most of 2018, volatility in stocks has once again dropped to below-average ranges. Lastly, while the latest round of economic data has decreased somewhat from last years scorching pace of advancement, it’s still definitely not recessionary. In reality, the deceleration is constructive because it implies that the economy has fended off overheating, which would lead to even more extreme inflation, according to Golub.
Year-over-year evaluations are exhibiting weakened job gains and primary indicators are indicating decelerating fiscal growth, both of which are likely to continue to remain in the headlines. Even so, Golub forecasts that investors will come to appreciate the more agreeable setting and pay a higher multiple on the same amount of earnings.
“Equity investors can have a hard time with that because what they tend to think is ‘markets go up when news is good, and go down when it’s bad,’ said Golub. “They don’t tend to think the market can go up when the outlook is maybe not so rosy, but the backdrop is much less risk prone. But maybe that’s great.” Golub sees this type of scenario continuing on for quite some time.
While the existing post-financial economic crisis expansion is among the longest ever in the United States, the standard pace of growth has been significantly slower than what was noted in preceding cycles. This acts as a sign of a calmer environment with a smaller level of volatility that should also bring about recessions which are not as deep and are less frequent.
As the United States economic climate continues to develop into more services-based and business capital demands lessen, the market may hold interests rates low irrespective of the forthcoming central bank measures. Lower rates and risk premiums should each be conceptually lessened in such a setting. According to Golub, “If that’s the case, in coming years you could have an upward drift in stock multiples even though the earnings growth may be more contained.”
This, of course, leaves us wondering how long that might last?