U.S. and European equities are in for a bumpy ride into the end of the year..
Two things would ensure that the Fed raises rates by year-end. First, corporate results need to show revenue growth and an improving economy in Q3. Second inflation needs to climb to 2%, which would likely be due to modest economic expansion and rising energy prices. Investors are not betting against either theme materializing, as was evidenced by last’s week’s US equity market performance.
And let’s do not forget that we are in a situation that the markets are studying very closely the presidential campaign going on. This fundamental also weighted on the future of the stock markets. We have a slight tilt to be a bit more defensive, and tilt towards Asia and emerging markets relative to more developed markets. We have to be a bit more bearish, and again in a defensive mode till the end of the year.
My predictions for the European markets are a bit more pessimistic than the other analyst with rebound of 1.3% in the Stoxx 600 from Friday’s close. The gauge has already lost more than 7 percent this year, and investors have pulled almost $93 billion from funds tracking European equities during a record 35 weeks of withdrawals, according to a Bank of America Corp.
That’s the case particularly in the absence of sustainable profit growth to support prices. The S&P 500 trades at more than 18 times estimated earnings, compared with a 15.6 average for the past five years. The presidential election in November and a potential interest-rate increase by the Federal Reserve could trigger declines.
Equities are a tough asset to own without a clear, positive trend in growth,it’s tough to deal with these equity draw-downs because there are very few places to hide except for cash. Meanwhile, Goldman Sachs data show that retail ownership of the stock market is at the highest since the third quarter of 2007, edging up to 37% in the second quarter from 36% in the first quarter, while foreign ownership slipped to 15% from 16% during the same period.
J. Mason ♦