Log inThe US economy is showing its strength as stock markets reach all-time highs
As the world’s largest economy, the US is often referred to as an economic powerhouse. The International Monetary Fund (IMF) forecasts that US GDP will reach $20 trillion by the end of 2018, with China in 2nd place at around $14 trillion. China’s economy is expanding faster and will likely overtake the US as the largest economy at some point, but when looking at economic growth across traditional developed nations, the US is leading the way.
In the 2nd quarter of 2018, US GDP growth hit an annualized rate of just over 4%. This was a vast improvement on the first quarter of the year which saw US GDP increase at an annualised rate of 2.2%. As a result, recent news articles have been quick to highlight the strength of the US economy. Wage growth in the US recently hit a 9 year high, employment data has been positive, corporate earnings have been strong and productivity is improving. However, it is important to highlight that wage growth is struggling to beat inflation in the US, which means that many people won’t be feeling the benefits usually brought about by improved earnings.
On the flip side of those spreading positivity regarding the US, there are commentators who highlight that GDP growth in excess of 4% is too fast and that it could be an indicator the US is reaching the end of an economic cycle. Whilst this may be true in an ordinary cycle, it is important to bear in mind that the US recession brought about by the global financial crisis of 2008 was the longest recession since the great depression in the late 1920’s. It therefore stands to reason that the subsequent recovery may go on for longer than would be expected in a typical cycle, with the fairly subdued economic data of the past 10 years seeming to support this theory. Overall, the US economy looks robust and there is enough data to suggest that it can continue growing for the next couple of years.
US stock markets are at all-time highs with the most notable index, the S&P 500, reaching 2,902 points earlier this month. President Trump has been quick to praise his tax cuts and reforms which have boosted corporate earnings, pushing stock markets up. Capital expenditure by US companies (spending on infrastructure and equipment) has been limited since the financial crisis, but with improved incentives for doing so in place until 2022 and corporate earnings strengthening, we are now starting to see this increase. This may sustain the current bull market for some time to come, but there are also plenty of risks to be aware of, notably trade wars, the Federal Reserve raising interest rates too quickly and slowing economic growth.
Many investors have been increasing their exposure to the US in recent months, but we remain cautious of the risks which can be incurred when following the crowd. A significant number of US companies are trading on very high valuations, not least the FAANG stocks (Facebook, Apple, Amazon, Netlife and Alphabet’s Google). When company valuations are at these levels, it is questionable how much more the stocks can rise and it is important to be cognisant of how quickly they can fall if the market turns. In market conditions such as these, it can be extremely beneficial to use active fund managers for their stock picking expertise, avoiding the trading trends inherent with index tracking investments.