08 Jun The US Bull Market has legs!
The US bull market has legs
A couple of weeks back, my son asked “Mum, what’s a good stock to buy in the US?”. (Bear in mind he has been investing in the US markets for well over a year and does have the benefit of a mother who has a long history of investing.) Nevertheless, to his credit, he does his own research and while he listens to Mum, he doesn’t accept my opinion/advice as a matter of fact.
In this instance I suggested he buy Alphabet, Google’s parent company. In spite of a great price run up, the stock’s valuation isn’t stretched and the earnings runway for YouTube and advertising remain tilted in favour of upside surprise, meaning higher earnings.
For a twenty-year-old, I may have well said buy the horse and carriage. In his young mind, Google is a ‘boring, low-growth stock’. His response was “Nah, I want to make 50% on my money by the end of the year!”.
“Ok” I responded, “check out fuboTV”, which he promptly did, liked the story, bought some shares and made around 40% on his investment in about five days. So far so good, except for Mum who was kicking herself again for not listening to her advice!
To be fair, fuboTV had fallen some 70% since the February NASDAQ craziness and had subsequently reported a great first quarter earnings result. Bottom fishing or buying the laggards is not uncommon and in bull markets when money is always looking for the next big idea, then a bounce in a stock such as fuboTV is not unheard of.
But if you had been holding fuboTV from its high, you would need the stock to go up 233% just to reach a break even point at the 52-week high.
If you, like me, would be racing to hit the sell button after such a strong rally, think again. For the Reddit army of newbie call option inclined traders, a 40% plus return wouldn’t persuade most of them to get out of bed in the morning. The latest stock fad, AMC Entertainment (movie theatres) delivered an almost 3000% return snice the start of 2021. The Reddit crowd have little interest in fundamentals as most believe someone will be happy to take the stock off their hands at a higher price.
For the more conservative investors, this all sounds like bull market madness driven by extreme central bank liquidity or, put simply, push enough money into the system and it will find speculative ways to make more money.
Is it a bubble?
The pockets of speculative bubbles have been apparent for a while. Clean energy received the pump and dump when the Biden administration won office last November with the touted decarbonisation agenda. Tesla, the go-to stock of 2020, has been left desperate and dateless relative to the comeback kid, Ford Motor company, and Bitcoin enthusiasts have been hit with a risk-off trade via a tweet from one time fan Elon Musk.
Then there has been the calamitous collapse of Archegos Capital, the hedge fund which reportedly lost US$110 billion in one week.
None of the bubble bursts thus far have created a systemic risk to the US stock markets. But, there is no denying that pockets of the stock markets are very frothy (meaning elevated prices) and leverage (debt and borrowings) exposed to stocks remains high. This means the US stock markets remain vulnerable at some point to a risk-off event.
However, not all investors are taking the fast route like my son and the extreme Reddit gang. The slower-as-you-go, conservative investors have also funnelled money into stocks via ETFs and mutual funds.
According to EPFR in a CNBC article, more than half a trillion US dollars has flowed into ETFs and mutual funds in 2021. To put this number into perspective, “this represents 3.5% of the money accrued in these portfolios from the dawn of time through to Dec 31, 2020”.
(https://www.cnbc.com/2021/06/05/amc-is-an-amusing-sideshow-as-the-calm-bull-market-forges-ahead-pulling-in-billions-from-investors.html)
Popular ETF provider Vanguard has experienced a US$300 billion inflow into its ETF products over the last 12 months.
With inflows of this magnitude and a strong US first quarter earnings reporting season, investors won’t be surprised to learn that the S&P500 total return, according to CNBC, is up 13.3% in 2021 and, if you were brave enough to annualise the number, a 34.3% return may be in the offing.
But, as most of you know, the life of the stock investor is not that clear cut. A 10% sell off is not unusual, no matter how unappealing the event is for investors.
Follow the numbers
Although the US employment payroll numbers delivered at the end of the first week of June, didn’t meet expectations at 559,000 in May versus the 671,000 forecast, some would say the numbers were just right, not too strong to suggest the US economy is overheating and not too weak, pointing to signs of slowing economic growth.
However, employment figures represent only a portion of the mandate for the US Federal Reserve, with the world’s largest central bank keen to see a sustained pick up in inflation before changing the highly accommodative monetary policy stance.
The bottom line is that US stock markets will continue to be driven by macro-economic data with the highly debated inflation numbers to remain the key driver of sentiment, the US 10-year Treasury yield and equity markets. With higher inflation, cyclical stocks (think financials, materials and energy) rally; with lower-than-expected inflation, growth (technology stocks) rally.
On balance, I do not think it takes too much of a stretch of your imagination to accept the premise that once the Federal Reserve starts to taper (reduce the US$120 billion monthly bond and mortgage backed security buying programme) the reduction in liquidity will create a selloff in some of the sectors of the stock market. Arguably, stocks such as fuboTV have already experienced such a retracement.
How quickly the Federal Reserve moves from talking about tapering to actually tapering and eventually raising rates will all be based on the as yet unknown pathway of inflation. Expectations are broadly in place for tapering to start early 2022 and interest rates to rise in 2023, sometime!
For what it is worth, I would always suggest if you made 40% on your money in a week, as my son did, then take the gift and accept that lady luck was at the very least a guiding force. Of course, you risk leaving more on the table for someone else, but a profit is not a profit until you sell.
If you are more like the tortoise than the hare, then the go-slow route and adding to the ETF pool means you don’t have to be so quick to take money off the table.
For now, US stock markets remain impervious to shocks, but then maybe the markets haven’t received the shock that sends them down more than this year’s 8% May retracement. What that shock is, remains the ‘known unknown’ for investors.
Disappointment and profit taking can come from an economy running too hot (therefore interest rates are presumably rising) or a possible economic slowdown from the sharpest ‘V-shaped’ recovery since WW2. Taiwan tensions remain a potential black swan event and who knows when a leveraged fund might upend volatility.
As usual, know your own risk tolerance and the stocks or ETFs you own.
For more information about how to invest in US stock markets and the tremendous money-making ideas that await you, either from Australia or directly into the US, Shareplicity 2 A guide to investing in US stock markets has been published. The first chapter is available to download for free at the Shareplicity website (www.shareplicity.com.au). Author signed copies are also now available to purchase or you can pre-order at Booktopia.
Danielle Ecuyer has been involved in share investing in Australia and Internationally for over three decades, both professionally and personally. Her experience and knowledge has been combined to help new or existing investors with long term wealth creation and income generation in her first book, bestselling Shareplicity: A simple approach to share investing (Major Street Publishing $29.95). Due to demand Shareplicity 2 A guide to investing in US stock markets (Major Street Publishing $34.95) is now available. Find out more at www.shareplicity.com.au
Disclaimer: Shareplicity offers information that is only general in nature. It does not take into account your personal financial situation, needs or objectives. Nor does it take into account the financial needs of any specific person. You should consider your own personal financial situation and needs or seek financial advice before making any decisions based on this information.