Fall Rally

Financial analyst Sergey Suverov on the reasons for the growth of the American market.

The American stock market has set new historic records, despite the growing risks of an imminent recession and deteriorating macrostatistics in the United States and China amid the trade war. President Donald Trump is expecting a significant part of the deal with China to be signed earlier than planned. It has been said before, but this time, traders are more likely to believe Trump’s promises. In the middle of an impeachment inquiry against him, Trump needs a deal, especially since elections are just around the corner.

In addition, the latest rise in the S&P 500 was helped by Microsoft Corp. shares, which rose nearly 2.5% after Microsoft received a $10 billion contract from the Pentagon, beating out Amazon. In general, corporate America has not yet felt the effect of a possible impending recession, as 50% of the companies from the S&P 500 reported results that were about 2% better than the analysts’ consensus forecasts. The speculation of a decrease in profits has not yet been confirmed.

On the other hand, American stocks get some kind of artificial boost in the form of buyback programs by companies, which, other things being equal, lead to an increase in indices. Over the past two years, U.S. corporations have bought $1.4 trillion of their own shares in the stock market. Although this year’s buyout volumes are more modest than last year’s, they are still significant enough to stimulate the market.

Though the threat of a recession in the U.S. economy is not 100% certain, inflation and unemployment are at comfortable levels. Everything is well with consumer demand, which is partially because of high employment and rising salaries. There are serious threats, however, for America: a huge national debt and a budget deficit. But these are long-term challenges that will have to be addressed in the coming years. The stock market is still ignoring these issues, focusing instead on the situation in the corporate sector, on monetary policy and increasing the amount of funds in the economy available for investment.

At the same time, if you look at the basic scenario on the horizon of three to five years, then the return on investment in stocks will decrease and may reach 2% to 5% annually. Reasons for the slowdown in profit growth include increased competition and the saturation of commodity markets. Nor should we discount the rise of protectionism, which will have a negative impact on world trade.

This foreign trade policy of some states inevitably stems from political populism, the desire to solve their problems at the expense of other countries. Furthermore, the possibility of additional fiscal support for the U.S. economy is limited, as it is necessary to help the poor through the redistribution of state budget funds, which may require tax increases. The problem of social stratification in America, as in many other countries, is becoming more acute.

However, if we look at short-term speculation, the dynamics of American indices favor the growth of stock market optimism in other countries, including Russia. 2019 was a very successful year for the domestic stock market. The Moscow Exchange Index rose by more than 20%, while the ruble got stronger. Some stocks, such as AFK Sistema PAO, gained more than 70%. In addition, the year was marked by an increase in the securities of Gazprom, which was unexpected for many stock traders, but contributed to the accelerated dynamics of the indices.

Russian companies are trying to increase payments to shareholders. Companies such as Gazprom, VTB and Lukoil announced this year an improvement in their dividend policies. PhosAgro announced its intention to pay up to 100% of its free cash flow in dividends. The positive dynamics of the Russian market index are also affected by the sanction respite—the United States is now busier with the trade war with China than with Russia.

Other traditional issues for the domestic exchange include how it is being underestimated relative to its peers (our market is several times cheaper than not only the American market but also the Brazilian and Mexican markets), as well as high dividend yield and increased activity by retail investors on the Moscow Exchange. It should be noted that at the end of the year, a traditional Christmas rally usually takes place, and if the earning season is successful not only in the U.S. but also in Russia, then hopes for growth at the end of the year may well materialize.