With the S&P 500 down 10-15% from this year’s high, US and developed market stocks are ripe for the picking.
Here are five reasons to be loading up on US stocks:
The US employment machine continues to grind out new jobs, with 173,000 jobs added in August, reducing the US unemployment rate to 5.1%, the lowest since April 2008. Furthermore, weekly earnings are up a healthy 2.5% over the last 12 months and appear to be accelerating. The strong job market continues to drive US consumer confidence, with consumer spending growing at a 3.9% pace in Q2/2015.
2) US stocks continue to rise after the first Fed rate hike:
Rate hikes are great news for stocks once investors get over the angst of the first move. The Fed typically only hikes rates when the US economy is on firm footing and growth is on an upward trajectory. As a result, corporate earnings continue to be boosted by the strong US economy and stocks typically continue to rise as a result. Referring to the chart below, after the first Fed rate hike, stocks have averaged a return of +4.5% after one year and +18.5% after two years.
3) M&A activity will likely continue to increase:
Stock buybacks have been a popular way to generate earnings per share growth for many US companies over the past few years. However, as rates begin to rise and valuations move higher, stock buybacks become difficult to justify as a good use of capital. As a result, companies attempt to generate earnings growth with either organic growth or mergers and acquisitions (M&A). Referring to the chart below, US M&A activity continued to rise following the past Fed rate hike cycles. Following the latest Fed rate hike cycle, the total value of M&A activity in the US doubled from approximately $1 trillion in 2004 to $2 trillion in 2007.
4) Rumours of China’s death are greatly exaggerated:
While China’s stock market has been pummeled in 2015, it appears to be having very little impact on Chinese consumers. Recent comments from Nike’s (NKE) latest quarterly conference call last week indicate that its sales in China continue to be the global regional growth leader. Nike’s Brand President commented, “…in greater China, revenue was up an amazing 30%,” and it expects the “incredible growth” in China to continue for years to come. In fact, Nike’s apparel scheduled to be delivered between September 2015-January 2016 was up 27% as of August 31, 2015.
Furthermore, Apple (AAPL) has thus far matched its 3-4 million units sold in China for the new iPhone 6S/6S Plus versus the iPhone 6/6 Plus. In our view, this is another strong indicator of a healthy Chinese consumer considering the latest iPhone is just an S version and not a full body type upgrade.
5) Europe’s growth is finally broadening:
While Western Europe and the Euro-area have taken much longer than the US to enter its recovery and expansionary phases, growth in the region continues to accelerate. Euro-area economic confidence unexpectedly increased in September to its highest level in more than four years as sentiment in the industrial and services sectors improved. This increasing confidence has occurred despite the volatility that financials markets have endured over the past two months. Europe’s heavyweights France and Italy are leading the way and taking the growth baton from Germany.