Investors should not take money off the table as the US bull market could still run ‘for some time’ yet, says JP Morgan Asset Management.
The asset manager sees sweeping tax reforms driven through congress by President Trump as a vital support for investors in US equity markets.
The effective tax rate that companies in the US pay has been slashed from 35% to 21%.
This will help underlying economic growth across the pond, according to JP Morgan global market strategist Nandini Ramakrishnan. The US economy is expected to grow by about 0.6% in 2018, a fairly lacklustre pace but growth all the same.
Growth of 0.2% is currently anticipated for 2019, although those forecasts could well change as we progress this year.
INVESTORS WERE BIG WINNERS IN 2017
US equity markets rallied strongly through 2017. Both the S&P 500 and Dow Jones indexes set records during the year, with the Dow jumping an astonishing 22%.
The S&P 500, arguably the better measure of wider stock market health, was not far behind, increasing 17%, driven by strong earnings growth from many of the tech superstar stocks, such as Apple, Amazon and Facebook.
This is illustrated in the graph below, highlighting higher growth in corporate profits and business investment since 2016.
Relatively stable employment growth also helped drive confidence in US equities, says JP Morgan.
WHAT IF EQUITY MARKETS STUTTER?
The investment bank study also explains why investors should avoid calling the end of the stock market bull run too early.
‘Even if we’re wrong about this, the cost of cashing out too early can be greater than doing it too late,’ says Ramakrishnan.
In the year before global stock markets crashed in 2008 investors could have made an average return of 20% in US equities, Ramakrishnan's research has found.
Once the markets crashed, investors suffered an average 11% decline in US equities, inside in the first six months. This is used by JP Morgan as an illustration of windows of opportunity to sell shares available to investors.
EQUITIES HAVE BEEN LONG-RUN WINNERS
Investing in equities beats returns when stacked up against credit, government bonds and cash, according to Nandini. Cash is most likely to see negative real returns for the ninth year in a row as inflation risk increases.
On the UK, the strategist remains cautious due to the effects of Brexit negotiations, but believes it is still good for seeking out assets.
