The US stock market has been remarkably tranquil this summer. Volatility has dropped and worries have grown that investors are complacently marching lemming-like toward a cliff.
There are reasons for concern. Despite the lackluster earnings back-drop the S&P forward P/E is trading at near a 14 year high. The median stock trades at record 21 times earnings which even surpasses its recent high before the financial crisis. With the summer doldrums at an end, predictions of an imminent correction are proliferating. One of the trigger will be the Fed. It has put investors on notice for a rate hike later this month. That has contributed to the recent weakness of the stock market. Data from the US is likely to remain equivocal and Investors may take a breather in the hectic game of second guessing the Fed during the week-long blackout period before the next FOMC meeting on 20-21 September. However, any strong data will only cement the case.
Given that investors are only pricing in a thirty-three percent chance of a hike the potential for an upside is real. Subdued volatility does not mean that the markets are heading towards a crash. Some non-traditional stock market gauges are actually more positive. Take, for example, Wall Street analysts who are increasingly negative. That is a reliable contrarian indicator. Indeed, Bank of America Merrill Lynch Analysts Index fell to its lowest in three years in August. Equity returns have historically always been positive the following twelve months after such a subdued reading.
Below the surface of the superficial supine market there has been a rotation from defensive industries such as pharma and utilities towards more cyclical stocks such as banks and electronics. This is a sign of improving optimism investor on economic growth.
Even if there is a stock market wobble it is likely to be short-lived. While the Fed is prepared to tamper the party by tightening its monetary policy, other central banks are still busy pouring generous shots of sake, gin and Jägermeister. Any severe market reaction will put the Fed to the sideline again. In other words, the buy- the-dip investment strategy that has reigned since the financial crisis will probably continue to do well. Investors may consider using short-term tactical pullback triggered by event risks from next week’s FOMC and Bank of Japan meetings to buy quality stocks and credits in our favorite markets at more attractive levels.
With so much spirits in the markets, we have turned our attention to a brewer. Anheuser-Busch InBev and SABMiller expect their merger to close soon, and the combined company will control around thirty percent of the global beer market. No other brewer in the world can match that scale: the merger will open fast-growing markets such as Africa, where some of AB InBev's brands do not currently have a presence. Shareholders shouldn't expect frothy growth, but bringing Inbev’s managerial prowess and cost-consciousness to SABMiller's operations should help the company exceed expectations for cost savings and drive growth at slightly higher rates.
The bears will have their day – but not yet. In the meantime, we will have a beer. If you are interested in hearing more, we are happy to share our thoughts…and a can.
Zurich 15th September 2016
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