This Week's Focus: Has the US stock market peaked?

This Week's Focus: Has the US stock market peaked?


Has the US stock market peaked?
So far this year European stock markets recorded increases of about + 20% on average, while on the other side of the Atlantic, the major indices recorded slight increases or remained flat.

Given this fact, we wonder whether US markets have peaked and if it's time to leave that market.

We have analyzed where capital flows are directed in mutual funds. The following chart shows the weekly US stocks cumulative flows into and their correlation with the S & P 500 so far in 2015.

Contrary to what one might expect, in view of the positive development of the S & P500 index recorded rises of + 2.5%, flows away from the US market (11 000 million USD) in 2015. The relationship is further patent to beat the S & P500 level of week 10 (2060 pts), where they begin to register net outflows increased.

With negative capital flows, what factors could push the US markets?
Current valuations do not seem particularly attractive, but rather demanding levels. The S & P 500 trades at a PER (ratio of price / earnings per share) of 19.1, which puts it about 3 times above its historical average of 16. In addition, some sectors such as Health and Consumer Discretionary, have strong overvaluation compared with their historical averages.

A weak currency may represent better prospects for corporate profits by increased exports and improved competitiveness. The dollar, however, has appreciated against most currencies and this should adversely affect the benefit of businesses, especially exporters and their competitiveness with other companies located in other countries with a weaker currency, such as Germany Japan.

Monetary policy
US monetary policy remains accommodative now, with interest rates close to zero, although the expectation is that the Fed will begin to normalize levels facing half of 2015. It should therefore do more harm than help markets , the main attraction of short-term bonds if interest rates increase.

Of all the factors that we have listed, it is the only one that can help to keep rates at their levels. As the following graph shows, American companies maintained a high pace of buybacks and following a positive trend.

Companies may purchase its own shares on the market (share buyback), favoring its price. The reason is the lower cost of capital which have other sources of funding such as debt (corporate fixed income). In the years after the crisis, companies have issued debt at very low interest rates, thereby reducing their financial cost. Part of these funds can be applied to the repurchase its own shares, holding his quote.

The company hopes that its stock will rise and repurchase its shares so that it can make a profit and regain liquidity later. In return, it can cause an artificial increase in prices but the fundamentals of the company are weak.

In the US, 72% of companies in the S & P500 is following a policy of repurchase and Apple was the most active during the 4th quarter of 2014, with 6.1 Billion USD in repurchased shares. At the other end of the scale, the sector little inclined to repurchase actions--and Telecommunications was the least volume of repurchase recorded.

In February 2015, buybacks announced by the companies in the S & P 500 totaled 104.3 billion USD, according to Bloomberg data published TrimTabs.

Buy or sell?
The American market, based on the S&P500 index, presents:
  • 1. Above its historical average valuations.
  • 2. Appreciation against the euro and other currencies of developed countries.
  • 3. If interest rates rise in the US, is a disincentive for equities. A first rate hike before the end of 2015 is expected.
  • 4. The volume of repurchases still near recent levels, but both volume business as the quarterly volume does not increase.
Therefore, without ruling out that the US stock market may have more of course, it should be more cautious and profit taking seems appropriate. For anyone who has not invested in the American market, we believe it is not a good time to take positions.

Sources: FactShet Research, Lipper Thomson Reuters, Bloomberg