US equities have strongest start to year since 1987
Tax reform and tech earnings send S&P 500 to its best one-day gain in almost a year
US stock markets enjoyed their strongest trading day in almost a year on Friday, continuing an explosive rally that has now seen the S&P 500 log its strongest start to a year since 1987.
The one-day gain of 1.18 per cent, the strongest since the 1.37 per cent rise on March 1 last year after President Donald Trump’s first speech to Congress, came despite the publication of figures on US economic growth that were significantly lower than most had hoped, and despite a rise in 10-year bond yields.
Instead, the announcement by the drugmaker AbbVie that its effective tax rate would drop to 9 per cent, far below the previously expected 20 per cent, sparked hopes that the effects of the corporate tax cut signed into law by the president last month had still not been priced into stocks.
Goldman Sachs’ index of the S&P 500 companies that previously had the highest effective tax rates, and should therefore benefit most from a tax cut, has outperformed the S&P by 6.5 per cent since November 15, when traders first gained confidence that the tax cut would be passed into law.
A presidential speech also helped the market’s latest rally. In Davos, Mr Trump failed to lay out the aggressive protectionist agenda the market had previously feared he might.
JJ Kinahan, chief market strategist at TD Ameritrade, said investors had taken cheer from the president’s “conciliatory” tone on Friday. “What he said today is a very reasonable, businesslike point of view,” he said.
Traders also cited a further weakening in the dollar, which raised hopes for stronger earnings by US multinationals. Also in Davos, Haruhiko Kuroda, the head of the Bank of Japan, commented that Japanese inflation was “finally close” to his target of 2 per cent, in comments widely interpreted to mean that the BoJ’s policy of asset purchases might end sooner than expected. This strengthened the yen and sent the dollar to fresh three-year lows against a basket of major currencies.
Gains were led by healthcare companies, which have underperformed in recent months, and by technology groups, after earnings reports prompted widespread sectoral buying.
Investors have shown increasing enthusiasm for stocks, adding more than $33bn to global equity funds in the week to January 24 — a record weekly sum — according to EPFR. US stock funds have proven a beneficiary, attracting nearly $20bn over the past three weeks.
Yet investors remained aware of the risks. Many noted that this is now likely to be the strongest January since 1987, the year of the “Black Monday” October crash. There is also a widespread belief that stocks have grown too expensive.
Lee Ferridge, head of multi-asset strategy in the Americas for State Street, drew attentions to valuations and “the view that they can’t go down, which we know historically is not the case . . . One way traffic is always dangerous”.
He added: “Now that most people are getting close to fully invested, or won’t be before too long, where does the next buyer come from?”