The US is Historically Overpriced but Enjoying Significant Momentum

The brutal weather in January and February across North East America has once again hit GDP growth. The combination of freezing conditions, a prolonged dock workers strike and a very strong US$ has led to the world’s largest economy contracting by –0.7% in Q1 compared to an expected 0.2% expansion. On the back of a high US$, American exports fell by 14% while imports increased by 5.6%. The trade deficit widened in March by US$15.5bn to US$51.4bn much to do with delayed imports.

Wall St stock value dropped after a weaker than expected US consumer confidence report, flat retail sales in April and May, and lower than expected industrial production.

With the slowing of output and GDP, some of the shine has come off US stocks that have enjoyed a terrific run of growth for the past few years. Some economists believe the US economy is running a little hot but consider the recent relapse in Q1 as a temporary blip. Goldman Sachs expects that a surge in delayed imports, low oil prices, low interest rates, high employment and rising wages will see the world’s superpower generate further growth. They are predicting a GDP growth figure of 2.9% in Q2.

The US Department of Labor has confirmed that US unemployment is now 5.5%. This represents a seven year low. Employers in the US created 280,000 new jobs in May on top of the 223,000 new jobs created in April. The March figures were 85,000 which were disappointing, and below expectation, but can be attributed to the seasonally poor weather in the North East. These figures did lead to a fall in US stock values, but the improved April and May figures reversed that decline. While employment growth continues at the current pace, Janet Yellan, the Head of the Federal Reserve, remains on course to raise the federal funds interest rates towards the end of 2015.

In an unusual move, the International Monetary Fund (IMF) has urged the Federal Reserve to delay any rises in interest rates until 2016 as they believe pockets of vulnerability in the US economy have emerged. Some fund managers are expecting a 2016 start to US interest rate rises. In which case emerging markets will take some comfort.

Despite these signs of growth in the US, we are conscious that American stock markets are currently trading on a price to earnings ratio (P/E) of 27, when the long term mean is 16. We are also mindful that with the wave of cheap money available, equity growth in US corporations is disproportionately being achieved through borrowing, share buy backs, and mergers and acquisitions (M&A) rather than from strong and rising profits. The US is therefore historically overpriced but is enjoying significant momentum due to its status as the first developed economy to emerge from recession.

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