Will the US investment market come home for Thanksgiving?
With Thanksgiving due on 22 November, Ana Rivero, Head of Strategy at Santander Asset Management, looks at the prospects for the US investment market: Says Rivero: “Investing in the US stock market this year has proved quite a journey so far. Growth expectations for US GDP have fallen sharply, especially since the deterioration in the sub-prime credit markets caused a new low in market sentiment and confidence.“Treasury bonds have rallied since mid-June, when 10-year yields were nearing 5.3 per cent, ending up to 4.3 per cent by mid-November, reflecting a 75 basis point ease in the Federal Funds rate, but also denoting less conviction on a V-shaped recovery of the US economy - in which the economy rebounds quickly from a slowdown. Indeed, expectations are pointing towards another 50 basis point cut in the next six months, possibly starting as soon as next month.
“Our view supports GDP growth of 2.3 per cent next year, therefore ruling out recession and putting monetary policy easing at an end by four percentage levels. This leaves little room for fixed income markets. If we consider nominal GDP growth, that is, 2.3 per cent plus 2 per cent inflation expectations, Treasuries yielding at 4.3 per cent appear fairly valued.
“As for the equity market, growth-style investing has been fashionable during 2007, with the Nasdaq outperforming the S&P by nearly double at the end of October. But we are aware that as much as fear drives markets, so does euphoria. In the short run, we consider that the market is placed for a slight correction, driven by financials and tech stocks, on the back of an expected 25 basis points Federal Funds cut, and weaker company results than expected. We would be keen to buy the market again on that correction, because we think the recovery is already in place, and will drive estimates up sooner than later.
“We think that the worst has happened in credit markets, although we could still be months ahead of the return of investor confidence.“