20. Mrz 2019 Equities

Stock-market impetus from the Fed

Stock-market impetus from the US Federal Reserve – strong gains at the start of the year mean the potential for further rises looks but moderate.

4 min. to read

The stock market started 2019 just how investors like it. Equity indices on both sides of the Atlantic rose strongly, clawing back almost entirely losses sustained since last autumn. For example, the S&P 500 US benchmark index rose by a good fifth between its December 2018 low and the end of February and is now only a couple of percentage points off its all-time high.

Two main reasons lay behind the sudden change of direction on the stock markets: first, signs suggest the US-China trade dispute is easing; second, the prospect of a less restrictive monetary policy from the Fed has pushed prices higher.

The possibility of a Federal Reserve U-turn on monetary policy helped the US stock market post a strong start to the year.

Fed ready to change course

At its end January meeting, the Fed pulled back for now from further interest rate hikes because of slower economic growth and a further drop in the inflation rate. Fed Chairman, Jerome Powell, had already stated that the central bank would divert from its tight monetary policy if that proved necessary to achieve the objective of maximum employment at stable prices.

Many investors interpreted these comments to mean that the Fed would loosen monetary policy to prevent a sharp stock-market fall if the economy lost steam, which boosted prices.

US equities fairly valued

After strong gains in January and February, US equities now look to be fairly valued. Measured by the ratio of the S&P 500 to corporate profits after taxes, the index is close to its historical average.

For the year to the first quarter of 2020, DWS experts expect an overall percentage return (price gains plus dividends) from global stock markets in the medium to higher single-digit range. Dividends will probably be an important component of performance. However, should there be positive news on the trade conflict, prices could potentially go higher. For that to happen, corporate profits would have to stabilise after adjustments downwards in the second half of 2019.

After the strong gains, there appears to be only moderate potential for further increases.

US growth weaker, but only moderately

For S&P 500 companies, DWS experts anticipate average earnings per share growth of 5.5 percent over the coming twelve months. Financials are likely to make a particularly strong contribution to earnings rises. Underpinning this scenario is a forecast that growth momentum in the USA will weaken only moderately to 2.6 percent in 2019, following 2.9 percent growth (preliminary end-February figures from the US Department of Commerce) last year. Inflation is also likely be within the Fed's target range of 2.0 percent.

Despite this positive outlook, investors should not lose sight of potential risks. The US economy is in the late phase of an economic upswing, but central banks' room for manoeuvre in counteracting this is limited by low interest rates. Stock-market volatility is therefore likely to remain high, and sharp corrections may be expected at any time.

Dividend-paying stocks at an advantage

Such setbacks create opportunities for investors to expand existing US equity market positions or to enter new ones. In light of continued low interest rates, dividend stocks should come into their own. As a rule, solid companies that have consistently paid dividends for years – or even increased their distributions – do not grow particularly strongly. They can, however, act as an anchor in weaker economic periods, lending a portfolio stability.

Conclusion

Thanks in part to the Fed, widespread pessimism at the end of 2018 has given way to a more favourable market assessment. Surprises that could drive the market higher have probably already been partly priced in, however. Investors should not therefore simply expect stock-market performance in the first two months of 2019 to continue. However, should there be substantial progress in the US-China trade dispute, US equity markets could soar once more.

All statements of opinion reflect the current assessment of DWS International GmbH and are subject to change without notice. Forecasts are not a reliable indicator of future performance. Forecasts are based on assumptions, estimates, opinions and hypothetical performance analysis, therefore actual results may vary, perhaps materially, from the results contained here. Past performance, actual or simulated, is not a reliable indication of future performance.

DWS International GmbH as of March 20, 2019

CRC 065932(03/2019)

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