The great US stockmarket melt-up

We’ve seen a 'melt-up' in the US stockmarket, with the S&P 500 up by 12% in less than a month. But storm clouds are gathering.

We've seen "a melt-up" in the US stockmarket, says Vito Racanelli in Barron's. After its brief October wobble, the S&P 500 is up by 12% in less than a month. It has notched up almost 50 record highs this year.

But storm clouds are gathering. For one thing, US economic growth looks increasingly solid. It may seem odd to describe this as a "headwind". But the stronger economy is also pushing up the value of the US dollar against other currencies. In turn, that hits the value of any overseas profits that American firms make that's around a fifth of profits made by S&P 500 firms.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

Stronger growth also means lower unemployment and more demand for workers good news for staff, but bad news for profit margins. Margins are at their highest level in over 20 years, says Capital Economics. But a tighter labour market will see a previously compliant labour force demand a greater share, says John Authers in the Financial Times.

719-markets-chart

Secondly, share buybacks have played a big role in propping up earnings per share around 90% of earnings have been returned to shareholders via buybacks or dividends this year. In fact, "buybacks swamp the total invested by mutual funds and pension funds combined".

Advertisement
Advertisement - Article continues below

But how much more momentum can be squeezed out of buybacks? Record-low interest rates, which have encouragedfirms to borrow to buy back equities, have helped to fuel the trend. But interest rates are expected to rise next year, which will make the trade-off less attractive. That in turn will prompt investors to question whether share buybacks are really such a good use of their cash companies have an unfortunate historical tendency to buy their own shares at expensive rather than cheap levels.

On that front, the S&P 500 is already priced for perfection on a cyclically adjusted price-to-earnings ratio of 27.

Yet all these problems seem likely to slow the market down rather than cause it to slide. The main driver of the past five years endures: cheap or free money. The US Federal Reserve may have stopped its money-printing programme, but Japan is printing fast and Europe may soon join. China also appears to be loosening monetary policy. That money has to go somewhere, regardless of the fundamentals. "The music is playing," says Blue Marble Research's Vinny Catalano, "and you have to dance."

Advertisement

Recommended

Visit/517688/the-british-equity-market-is-shrinking
Stock markets

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019
Visit/516944/why-wall-street-has-got-it-wrong-again
Economy

Why Wall Street has got the US economy wrong again

The hiring slowdown does not signal recession for the US economy. Growth is just moving down a gear, says Brian Pellegrini.
25 Oct 2019
Visit/511212/reasons-for-investors-to-be-bearish-but-stick-with-the-stockmarket-bulls
Stock markets

There are lots of reasons to be bearish – but you should stick with the bulls

There are plenty of reasons to be gloomy about the stockmarkets. But the trend remains up, says Dominic Frisby. And you don’t want to bet against the …
17 Jul 2019
Visit/510684/good-news-on-jobs-scares-stockmarkets
Economy

Good news on jobs scares US stockmarkets

June brought the best monthly US jobs growth of the year, but stockmarkets were not best pleased.
11 Jul 2019

Most Popular

Visit/520525/currency-corner-how-high-can-the-pound-go-against-the-euro-in-2020
Currencies

Currency Corner: how high can the pound go against the euro in 2020?

In the month in which we should finally leave the European Union, Dominic Frisby takes a look at the pound vs the euro and asks just how high sterling…
13 Jan 2020
Visit/520575/20-predictions-for-the-2020s
Investments

Where will markets be in 2030? Here are 20 forecasts for the 2020s

A lot has changed in the last ten years – stockmarkets soared, technology transformed our lives and politics has changed beyond measure. Here, Dominic…
14 Jan 2020
Visit/520338/how-much-the-state-pension-will-rise-by-this-year
Personal finance

How much the state pension will rise by this year

While Boris Johnson promised to hold a full budget within 100 days of his election victory, many of the details of next year’s state pension increases…
10 Jan 2020
Visit/520553/money-minute-wednesday-15-january
Economy

Money Minute Wednesday 15 January: UK inflation and house prices

In today’s Money Minute, we look ahead to the latest UK inflation and house price figures, plus we have Germany’s GDP data for 2019.
15 Jan 2020