One Man’s Opinion: Do US Stock Prices Look Stretched Now?

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92835431The rise in geopolitical tensions in recent weeks that triggered a stock market slump in the US validated Ameriprise Financial’s Chief Market Strategist David Joy’s call in June for offloading equities.

While equities are likely to be punished further as markets are probably halfway through the latest move, there is an opportunity for a relief rally if the news in Ukraine eases, David said. But it’s likely to fester for some time and markets are likely to see support around the 200-day moving average, which takes the S&P to about 1865. That’s the full extent of the sell-off if the current trend continues, he added.

Many investors complain there is nowhere to go but US stocks even as the S&P 500 has returned only about 3.3 percent year-to-date. The dollar has not done great either although US Treasuries have returned about 3.8 percent while gold is up 8.7 percent year-to-date.

Asked where investors should allocate money, David said US equities look attractive for the long-run, i.e. for the next two or three years. However, there are interesting opportunities in the commodities sector. In grains, corn is down 55 percent from its peak while soybeans have shed 32 percent.

They are likely to find support at these levels and investors should consider them at these levels after a record harvest last year and probably this year. At current prices, natural gas also looks interesting as NG is likely poised for an uptick going into the colder weather, he argued.

Asked if he believed economic growth in the US is going to be robust enough to provide a lift to commodities, David answered in the affirmative.  The US economy is probably growing at an underlying trend of about 3 percent, although not every part of the economy is doing great.

Housing is a little soft and consumers have got a few issues. But at the same time, production is doing very well, which will be supportive, and the economy is likely to achieve a 3 percent annual growth rate. The fiscal side is starting to dissipate and it’s starting to look quite good from here on, he noted.

Asked how the economy could achieve a 3 percent annual growth when the first half has possibly grown by 1 percent, David said the economy is likely to achieve that number when taken an average after the next six months. The first quarter growth reading was an aberration that was related to the weather.

While the economy is unlikely to maintain the second quarter’s 4 percent annual rate, an underlying trend of 3 percent seems more realistic. The year is probably going to average 2 percent, but the run-rate that the economy is going to achieve is more likely going to be closer to 3 percent rather than the 1 percent that was witnessed in the first-half, he observed.

Many big investors like Warren Buffet and David Einhorn are holding record amount of cash because of lack of investment opportunities. Large American corporation are not lagging either and companies like Microsoft, Coca-Cola, Apple and Ford have built huge cash reserves overseas.

Asked to explain the implications of US companies holding huge cash in offshore accounts and not bringing them back to spend on capex (capital expenditure for creating fixed assets) and future growth, David said there are two issues involved. The nature of US corporate tax-code is skewed and incentivizes companies to keep their profits overseas.

The primary implication of that is a lot of US money will never be invested back and the solution is very simple; reform the tax-code though it may not be simple politically.  Talking about individual investors like Warren Buffet and David Einhorn holding record cash,

David said back in June stocks valuations looked pretty stretched. They wanted to buy cheap assets and that’s probably the reason they thought it was prudent to raise some cash. Prices are still stretched and investors are likely to find better entry points in many asset categories, particularly stocks in the next six months. Holding cash looks like a better option even if there’s no yield, investors at least would not lose value, he concluded.

You can watch the video here.

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