Financial Comment - State of US economy, markets

Current state of the U.S. economy and markets

Many Ukrainian Credit Union Limited members are asking questions about the current state of the financial markets and economy. We have recently come across an interesting summary of these issues by Jim Kelleher, CFA, Director of Research at Argus Research (as per seekingalpha.com). He believes that the growth of the American stocks, which has been happening in the last five years, has not lost steam and that the market is not overvalued. He admits that this bull-market is getting up in years as the 11 bull markets since 1945 have averaged 4.5 years  (according to S&P/Capital IQ). However, it does not necessarily mean an imminent end to this bull market. Kelleher notes that the market P/Es remain reasonable. Based on his estimates, the S&P 500 2014 P/E is 15.6 times, higher than the average for the last five years, but lower than the peak P/E in recent bull markets – at 27-34 times. Kelleher expects that the faith of the market will in large part depend on the U.S. job market which will define the timing of the Federal Reserve’s rate hike.

Some U.S. economic growth indicators have recently been revised downward – 4Q/2013 GDP growth was lowered from 3.2% to 2.6%. Expectations are that 1Q/2014 GDP may grow by 2% or less due to the severity of the winter weather. Despite these lackluster expectations, Kelleher sees prospects for solid growth later in 2014. In 4Q/2013, the U.S. economy showed positive signs: real personal consumption expenditures picked up to +2.6%, non-residential fixed investment increased by 7.3% and exports grew by 9.4%. Kelleher expects a 3% growth for GDP in 2014, which would be the highest growth rate since 2005. Major risks to this outlook coming from geo-political events, such as a worsening of the situation in Ukraine.

In terms of different sectors of the U.S. stock market, Kelleher currently prefers cyclically sensitive sectors and recommends Energy and Materials based on the outlook for improving economic activity in emerging economies, and fiscal and monetary trends that favor commodities prices. At the same time, Argus Research expects that Consumer Staples, Telecom Services, and Utilities sectors will underperform this year.

By: Ukrainian Credit Union Limited