The week in the markets: 1998 all over again?

Two weeks on from the US Presidential election, investors continue to price in what they expect from four more years of Donald Trump in the White House. With control of the House of Representatives now confirmed, the red sweep is fuelling a surge in markets. Investors with longer memories are wondering whether we have seen this movie before.

Irrational exuberance?

Former Fed chairman Alan Greenspan famously warned investors about the dangers of ‘irrational exuberance’. He was too early. In 1996 when he coined the expression, markets looked expensive but still had four years to run before the dot.com bubble burst.

Within a couple of years, however, signs of frothiness were becoming apparent. By 1998 buoyant sentiment was pushing markets to new highs while more cautious investors were preparing for the end of the bull market. The echoes today are growing ever more insistent.

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Everyone is still enjoying the Trump Bump, a sugar rush of deregulation and lower taxes. The new President will re-enter the White House with a buoyant economy and a boost from falling interest rates. Adding a fiscal boost to that cocktail could add fuel to the fire.

The equity rally is broadening out. Both the top 10 and the rest of the S&P 500 are hitting new highs. Even the underperforming Russell 2000 smaller cap index is close to its 2021 peak. Risk assets like Bitcoin are on fire, breaking above $90,000 last week. And the dollar is back at the top of its three-year range. 

Shares are being boosted by an unusual combination of rising earnings and high valuations. Usually, the two march to a different beat but when they rise together they provide a meaningful tailwind for the market. The good news is that earnings grew by 9% in the recent third quarter results season. If, as expected, valuations stop rising or even fall, higher earnings can pick up the baton.

American exceptionalism

The buoyancy of the US market is not being felt much beyond Wall Street. That’s both a reality check and a reassurance because it suggests that there’s still value in markets outside the US. Europe, in particular, looks to be on the frontline of Trump’s protectionist approach. While US stocks have risen 25% this year, European shares are barely higher in dollar terms. 

And the euro is under pressure as investors look at perhaps twice as many rate cuts in the months ahead from the ECB as we’re likely to see from the Fed. The eurozone currency stands at just $1.05 and many expect it to dip to parity with the US dollar. 

It’s a similar story here in the UK, where the pound is down at $1.26, 2% lower last week as lower than expected GDP last quarter and the expected impact of the recent Budget’s higher business taxes weigh on sentiment. The new Labour government’s honeymoon has been short-lived. 

Gold losing its lustre

In other markets, a highlight has been a U-turn by gold. Having risen by 35% this year, bullion has fallen back by 7% in a month to around $2,560 as investors assess the impact of a Trump policy platform on the precious metal.

Although gold is seen as a safe haven - and so likely to be in favour as the situations in Ukraine and the Middle East deteriorate - it pays no income and so is relatively unattractive if interest rates stay higher for longer. A rising dollar is also bad news for gold because it makes the metal more expensive to buyers using other currencies.

One other clear loser in the past two weeks has been vaccine stocks like GSK, Sanofi, Pfizer and Moderna. These shares have all tumbled on news that Trump has appointed renowned vaccine-sceptic Robert Kennedy Jr as the US’s top health official.

And on the earnings front…

Although the third quarter earnings season is largely done and dusted now, one major results announcement is yet to emerge. Nvidia, the AI chip giant, reports on Wednesday. And with its shares close to an all-time high at $145, with a market capitalisation of over $3.5trn, this last bit of corporate news for this quarter is bound to be watched very closely.

Current expectations are for revenues to rise by 84% year on year and for net income to almost double to 70 cents a share in the latest quarter. If anything persuades investors that this is not just a re-run of 1998, it could be the remarkable earnings growth of the US’s technology sector.

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