US stock markets are at an all-time high! The S&P500 has just topped 3,000 for the first time ever, while the Dow has broken through 27,000, another first. The Nasdaq is also at its peak.
It’s a record breaker
Share prices have flown on hopes that the US Federal Reserve will cut interest rates later this month, possibly by 0.5%. Markets struggled last year as the Fed seemed hellbent on hiking rates another two or three times this year, but now those expectations have reversed. Fresh hopes of a trade deal with China also fuelled the surge.
The grim truth behind the euphoria is that after a decade of near-zero interest rates, the global economy is simply not ready for normal monetary policy.
This suggests two things to me. First, the developed world is turning into Japan, which means we can expect a second decade of rock bottom rates, possibly a third or fourth. We are hooked on monetary stimulus.
It also suggests that the global economy is weak and getting weaker, and the current market euphoria may not last.
Keep those profits coming
What happens next largely depends on the forthcoming US reporting season, and whether companies can keep pushing up profits into the second quarter. If they can, expect markets to climb higher. Otherwise, hold on tight.
There is no point trying to time the stock market because nobody knows where it will go next. The S&P looks expensive at 30 times earnings, according to the Shiller Index, levels only seen before the Wall Street Crash and 2000 tech crash, but it has been at this level for several years and still hasn’t crashed.
American beauty
What I would suggest is checking how much exposure you have to the US. The market has been on an incredible run, outpacing almost every other over the last decade. I’ve just taken a look at my US ETFs and they are flying.
However, this means that your portfolio may no longer be the balanced thing of beauty it once was. You may have more exposure to the US than you think – or want. This is likely to be the case with investors who hold the UK’s most popular investment fund, Fundsmith Equity, in their Stocks and Shares ISA.
The £19bn behemoth doesn’t have the word US in its title and I worry that many investors will not realise that it is 64.3% invested in US equities. The fund’s manager Terry Smith has crammed it with familiar names such as PayPal, Microsoft, Facebook, Estée Lauder and Intuit. Some 17.8% of the fund is invested in the UK, the remainder in Europe.
Bear market ready
Now Terry Smith is a smart man. Following his three reinvestment rules could help you make a million, according to Paul Summers. However, his reputation has been built on the US bull run, and will be vulnerable when that comes to an end.
Yes, I said ‘when’.
As we have seen with Neil Woodford, reputation counts for little because even the mightiest fund manager can come unstuck.
I’m not suggesting you sell FundSmith Equity or any of your US holdings, timing the market in this way never works. But it might be worth rebalancing your portfolio and tempering your expectations of Mr Smith, because it won’t always be like this. It never is.