Favourable economic news, decent profit reports and massive money creation is fuelling rising stocks and “reflation”, according to Harris Private Bank’s April Outlook for Financial Markets.
The North America-based private bank also believes that momentum for small caps is beginning to fade with large caps expected to dominate, and that a default by Greece would be unlikely to create much of a financial ripple.
The US is seeing favourable economic news with stocks rising, fuelled by decent profit reports and massive monetary creation. For now, the S&P 500′s earnings has reached its highest level since June 2008 and remains about 13% below its all-time high reached in October 2007.
Other good news, households have paid down debt consistently for the last 13 quarters with the worst excesses being written off. Eventually, wages will rise as we enter the later stages of the recovery, however this will contribute to higher inflation levels.
The Federal Reserve has been attempting to manipulate the Treasury market for three years; creating distortions with both intentional and unintentional consequences. The rally we are witnessing in crude oil against slightly higher interest rates is a by-product of one of the Fed’s intended consequences: asset inflation, says the report.
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“If oil prices were responding to a heightened geopolitical threat as many are speculating, then it would seem that the price of Treasuries would rally in sympathy, yet they have been falling in the face of rising crude,” said Jack Ablin, Chief Investment Officer, Harris Private Bank. “More likely, crude is rallying on the prospect of a debased dollar, and looking through this lens supports the “reflation” argument.
One of the outlook’s key recommendations, with regard to US portfolio strategy, is a preference for large caps over small caps. “Momentum for small caps is beginning to fade. Over the last four weeks the S&P gained nearly 4% while small caps declined a little. Longer term, small caps have outpaced the S&P 500 for about 11 years, picking up a gain of over 100% in the process.
“That’s a long stretch considering that large caps and small caps usually switch leadership every 5-7 years. Granted, the S&P started the period wildly overvalued relative to the Russell 2000, but small caps have overstayed their welcome owing to how relatively expensive they have become. We expect large caps to dominate the capitalisation race over the coming quarters,” advised Jack Ablin.
For investors seeking exposure to US large-cap equities, there are a number of ETFs to choose from, tracking a range of indices from the S&P 500, which tracks 500 large cap stocks, to the Dow Jones Industrial Average, which holds 30 mega cap stocks, to the tech-heavy Nasdaq 100 or the slightly broader Russell 1000. There are also a number of specialist ETFs including leveraged, trend-following, equal-weight and minimum volatility products.
London listed except where stated; many have parallel listings on Euronext, Deutsche Boerse and Borsa Italiana.
Lyxor ETF Dow Jones Industrial Average (LIND)
Credit Suisse Dow Jones Industrial Average ETF (CIND)
iShares S&P 500 ETF (IUSA)
iShares S&P 500 Monthly GBP Hedged (IGUS)
S&P 500 Source ETF (SPXS)
DB X-trackers S&P 500 ETF (XSPX)
Lyxor ETF S&P 500 (LSPU)
Credit Suisse S&P 500 ETF (CSPX)
HSBC S&P 500 ETF (HSPX)
Amundi ETF S&P 500 (500U)
ETFX Russell 1000 US Large Cap Fund £ (RONP)
Credit Suisse MSCI USA Large Cap ETF (CUSL)
Credit Suisse Nasdaq 100 ETF (CNDX)
Amundi ETF Nasdaq 100 (ANX)
Specialist large cap
DB X-trackers S&P 500 Equal Weight ETF (XSEW)
DB X-trackers S&P 500 2X Leveraged Daily ETF (XS2L)
Ossiam ETF US Minimum Variance Index NR (USMV)
iShares Morningstar Large Core Index ETF (NYSE: JKD)
Vanguard Mega Cap 300 ETF (NYSE: MGC)
RBS US Large Cap Trendpilot ETN (NYSE: TRND)
iPath Long Extended S&P 500 TR Index ETN (NYSE: SFLA)