Have US Markets run out of rocket fuel?

30 October 2018

Have US markets run out of fuel?

Investors now need to understand that the rocket fuel has run out and the coming year or two will prove much tougher for the real economy.

Gravitational pull

Markets around the world have fallen sharply so far in October, shaking investors out of their comfort zone. Why is this happening? In my view, it’s very simply a question of gravity – the US equity market has been on a diverging trajectory from reality: stocks have been hitting peak valuations as corporates have been reporting peak profitability, whilst the clouds are gathering on the horizon.

The evidence is there in the valuations: the US was, as of Friday, on a PE ratio of 21.6x and a P/BV of 3.3x, a 13% and 30% premium to the 10-year average respectively, and at a significant premium to international markets.

Inflation starts to bite

The US economy was already doing well, then it was boosted by an unprecedented tax cut, further fuelling short-term profitability. But that tax cut is a one-off event, the new tariffs on imported products and the oil price recovery over the last year have resulted in growing inflationary pressures. Hence the Federal Reserve has had to respond with an acceleration of the interest rate cycle.

Have US markets run out of fuel?

With inflationary pressures growing, an increasing number of corporates are guiding profitability expectations downwards for 2018 and 2019, citing the negative impact of rising costs and the burgeoning tariff war.

Market shakeout

International markets appear to have been reflecting this scenario more accurately year to date and now the shakeout would seem to have finally arrived Stateside. Investors now need to understand that the rocket fuel has run out and the coming year or two will prove much tougher for the real economy.

As long-term fundamental investors, we continue to find attractive opportunities in every sector and region, irrespective of the prevailing conditions. Moreover, this environment of macro-driven uncertainties helps to underline the benefits of stock-focused portfolios based on in-depth research and regional expertise, rather than those which are dictated by macro factors or market-directional strategies.


Important information

This information is issued and approved by Martin Currie Investment Management Limited (‘MCIM’). It does not constitute investment advice.
Past performance is not a guide to future returns.
Market and currency movements may cause the capital value of shares, and the income from them, to fall as well as rise and you may get back less than you invested.
The opinions contained in this document are those of the named manager(s). They may not necessarily represent the views of other Martin Currie managers, strategies or funds.