More growth predicted for US stock market

Oppenheimer's Stoltzfus bullish for the US S&P 500 index


Friday, February 02, 2018

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At the Jamaica Stock Exchange conference last week, in a presentation entitled “Boom, Bust and Recoveries”, Oppenheimer's chief investment strategist John Stoltzfus stated that his target for the US S&P 500 index for end 2018 is 3,000 points.

This was actually initiated on December 8 last year, and is based on a 20.5 times forward multiple of his estimate of 2018 aggregate S&P earnings per share of US$146.

Unlike other moments in his long career (he noted he had been lucky in calling for the current almost nine-year bull market to begin before the end of the first quarter of 2009), he foresaw a continuing period of modest economic growth “no boom, no bust: I'll take it”, and that stock prices would continue to “grind higher” rather than rising like Icarus, flying “too close to the sun”.

He started by asking the question “How much longer can this last?”, meaning that the bond market has had less volatility even as central banks continued to raise rates. At the time of his speech, stocks had been going up almost every day that month.

Stoltzfus argued that the reasons included “modest” economic growth and “tame” inflation, the latter being due to technology and globalisation (companies can do more work with fewer people). He observed that the JOLTS index in the US spoke to nearly six million unfilled jobs in the US, suggesting that workers now needed to be trained.

Over the last 20 years training departments had been cut, with workers expected to learn on the job, and training was only now coming back into “vogue”.

One of the reasons for the current tight labour market in the US was the opioid epidemic (employers can't find people to pass drug tests), despite people being available who were willing and able to work.

Nevertheless, the pool of emerging market labour, combined with technology — customer relationship management, logistics (shipping quickly) and outsourcing/reshoring — meant that despite the tight labour market, companies could continue to hire (and pay) cautiously, unlike in the past.

In an interview with the Jamaica Observer, Stoltzfus noted that another reason wages “haven't risen too fast” is that workers “still remember losing their jobs” during the financial crisis and don't want to “tempt the boss”.

In short, this meant that Central Banks could raise interest rates at a slower pace, which would be “less disruptive” to the stock market.

As an example, he noted that from its 48-year low of one per cent in the early 2000s, the US central bank had raised interest rates 17 times by one quarter of one per cent, to 5.25 per cent in 2006, during which time the S&P 500 rose 11 per cent, and small caps rose 20-plus per cent.

He argued that most of the “substantial” impact of tax reform had already been discounted, so now the market needed revenue and earnings growth to continue upwards, which he expected to be “substantial”.

He also argued that, unlike previous cycles, US CEOs had been remarkably responsible in terms of capital expenditure, and had not got too excited about recovery and “overinvested”, although he noted that overinvestment leading to overcapacity remained one of the biggest risks worldwide.

He added that contrary to what people had expected before 2017, populism had not risen: no Nexit (Netherlands), Frexit (France), and Merkel had remained on top (Germany).

In summary, he argued that in Oppenheimer's view the economic expansion will be both more moderate and persistent (lasting a number of years) than many people expect.

Stoltzfus told the Caribbean Business Report that this was due to his assumption that interest rates would remain relatively low despite modest “normalisation” as inflation remained “in check” due to cyclical and secular trends.

The risks to this scenario include a deterioration in fundamentals — such as manufacturing/services data indicating that the Fed had raised interest rates at too fast a pace, or in too large increments.

Other risks include leverage getting out of hand, and “blowing up” leveraged players (requiring them to get more liquid), as in 2008.

In the latter case, he doesn't think that will happen, as even if financial deregulation occurs as expected (for the US administration “the banks are next” after the victory over tax reform, the memory of the last cycle is too fresh.

Concerning trade, he argued that policy so far has been “disturbing in their bluntness if not in their intent”, as the US “could no longer afford to give away its competitive edge”.

In terms of the next 12 to 18 months, he believes the current environment will remain 'intact', as “no bull market comes with an expiry date”, and it will go on until there is some disruption in monetary policy, key commodities or other deterioration.

In terms of interest rates, he thinks it is very likely that the US treasury 10-year-yield will cross three per cent at some point this year, although he thinks the average yield for the year will still be in the 2.7 to 2.9 per cent range.

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