U.S. behind rising stocks

08.10.2018
"Recently, a rather worrying phenomenon is characterising the USA in particular. There is a very great difference between the so-called ‘soft data’ (surveys, expectations etc.) and so-called ‘hard data’ (directly measurable developments). In other words, both ISM and PMI figures are very high at the moment in the USA in relation to what the hard data ought to be showing. Soft data includes investor confidence, and the S&P 500’s rocket-like rise makes it hard to blame investors for being optimistic."

Thus writes Chief Strategist at Sparinvest David Bakkegaard Karsbøl, in his latest monthly comment.

Among the share-supporting trends, he points to; NFIB Small Business Optimism, consumer confidence, Trump supporters’ Make America Great Again, deregulations, tax cuts, the stock market’s powerful momentum, continued stimulating monetary policy (low interest rates), very strong earnings growth, very low unemployment, higher wage rises and greater equity in the housing market.

"At the present time, most of these trends are historically strong. So strong, in fact, that it is difficult to see how they can get any stronger. However, taken together, they have contributed to strengthening American shares in particular over recent years and we have seen almost euphoric tones among investors in the segment of large-cap growth stocks in the tech industry. Over the course of this year, a handful of mega cap stocks (FAANG and Microsoft) have generated the entire S&P500 return, while more or less the whole of the rest of the American market has been subdued.

As previously mentioned, the development of FAANG shares looks like an echo of the IT bubble because the pricing of these shares deviates markedly from the rest of the market – even though it is not as serious as during the IT bubble. In my view, there is therefore a risk of a ‘melt up’, where this segment first becomes even more highly priced followed by a correction that can be caused by factors such as new competitors, regulations, changes in consumer behaviour, or something else entirely."

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