US Preeminence

30/01/2015 at 4:18 pm

That was the title of a 2015 outlook piece from a major American bank out earlier this month. The piece itself had its strengths as well as weaknesses but what is beyond doubt is that it stands foursquare behind the prevailing consensus. The US economy will soon be global growth leader (in the developed world at least) – awesome! The dollar will continue to appreciate on the back of this and the monetary tightening it will bring with it – woohoo! Stocks will go up, though let’s not get carried away here; there won’t be another 2013, but maybe we’ll get last year all over again (S&P 500: +11.4%).

At present these views are so unanimously held as to represent truisms. Wall Street has been bullish on Uncle Sam for some time, fuelled at first by the shale boom and projections of US energy independence, but today the positivity is much broader and universally shared. These bull views are not wrong, exactly, but it seems pretty clear that the case is now being enthusiastically overstated.

Let’s look at growth first. Yes, the average forecast for this year is for real US GDP to go up by 3.2%, outpacing Japan, Europe, the UK and elsewhere. Uncannily enough, however, 3.2% is exactly the level of the post-war trend. So what is being feted is a return to trend growth – not, in fact, as terrifically exciting a phenomenon as all that. And should the forecast prove correct this calendar year will be the first over which growth even reaches that trend level since 2005. Yee-haw.

This is not to be sniffy about American prospects. Some of the structural strengths identified in the note referred to at the outset (Goldman Sachs, since you ask) are absolutely valid, and important: the quality and global reach of the tertiary education sector, the connected vitality of innovation and so forth. But the market effect of these things is the very definition of “long run”, and they have been features of the landscape in the USA while markets and the dollar have got up to all sorts of things, not all of them good for investors.

No: the real point concerns sentiment. Only three short years ago there was still talk over the Atlantic of jobless recoveries; the autumn of 2011 was a time of near-universal pessimism and panic, even at the Fed; over the summer it emerged that growth had stalled; Congress was trying to appear to threaten to push the country into default; S&P downgraded the sovereign debt rating to AA+; and of course stocks crashed.

This was an excellent time to be buying American assets.

Sentiment is a tough thing to measure. But if you remember the 1990s you will recall that they really were a time of optimism – even “exuberance”, as one famous proclamation had it. Does the shale boom really measure up to the rolling out of the internet? Is a return to trend levels of economic growth really as “preeminent” an accomplishment as victory in the Cold War? And best, perhaps, that we don’t mention Clinton-era phenomena such as budget surpluses and consistent real growth of well over 4%.

The truth is that the circumstances in which the US finds itself today are good, but they are nowhere near as exciting as some appear to believe. There may even be tiny hints of caution in today’s GDP print (ever so slightly lower than expected) and the current earnings season (reported EPS for the S&P 500 are up only 3% on the previous year with almost half the index having declared).

It is idle to speculate too heavily on these kinds of outcomes. But just as sentiment provided investors in risk with a great opportunity in 2011-12, so now does it pose a potential threat. There is simply not all that much room for disappointment – should there be any, of course.

There are some who favour massively overweighting the US just now at the expense of what they see as conspicuously less gilded markets. It is not clear that this is sensible advice.


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