It’s time to cut and run on U.S. equities, and—though the prevailing currency crises might not seem like a good place to park your cash—the bank says it’s time to shift some of that money over to emerging markets.
Why? Because Trump’s tax cuts aren’t going to be doling out much more love and the U.S. is poised to see its stellar economic growth slow down.
“The large U.S. fiscal boost this year, as well as the delayed positive impact of weak USD and low rates from last year created a ‘sugar high’ for U.S. assets this year,” JPMorgan Chase wrote in a note to clients, as reported by Bloomberg.
“We expect convergence of macro fundamentals between U.S. and international markets in the coming quarters; with equity markets tending to price forward fundamentals by six to 12 months, the time for the rotation may be now.”
Morgan Stanley’s Lisa Shalett has issued a similar warning recently, though she’s recommending investors divest some of their equities in favor of a position in … drum roll, please … gold.
But the message is the same: Investors have grown complacent, and Morgan Stanley doesn’t see U.S. equities continuing to outperform that much longer. Shalett also doesn’t see the U.S. economy continuing to grow at its current pace. Related: How Climate Change Is Impacting Global Hunger
“The relative outperformance of U.S. assets this year and this past decade is now at extremes. While that alone is not reason to question the durability of the trend, complacency is,” Shalett recently noted.
And complacency in the middle of an intensifying trade dispute is a huge risk. When the impact of tariffs isn’t immediately felt, the market shoves it under the rug—but that doesn’t mean it won’t hit hard.
In fact, should the latest round of tariff threats become a reality, JPMorgan thinks that we could see a $10 loss in combined per-share earnings for S&P 500 companies. So now is the time to weigh that risk and hedge bets on a correction.
“We gradually trim exposure to U.S. stocks and dollar assets, as they acted as a trade war ‘safe haven’ so far, but investors may ultimately rotate into more attractive foreign assets if trade concerns ease,” JP Morgan wrote. “The trade war and asset outflows already impacted foreign assets, creating an FX advantage and attractive valuations.”
It’s a tough pill to swallow when the S&P 500 is so delightful. On Wednesday, it was up again (along with the Dow) boosted by rising Treasury yields and an oddly relaxed outlook on the trade war.
And it doesn’t help when Bank of America Merrill Lynch is saying things such as: “The direct impact of the latest round of tariffs on the economy is likely to be minimal.”
But Bank of America isn’t alone in the bull ring, or in thinking that the trade war is nothing but hot air.
“There may be some tariff fatigue,” Bucky Hellwig, senior vice president at BB&T Wealth Management, told Reuters. “The worry factor that investors had early in this negotiation process seems to have waned a little bit. China is running out of bullets.”
By Michael Kern for Safehaven.com
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