Bullish US Retail Investors and Low Unemployment: Nuanced Implications for Equity Prices
US retail investors continue to embrace US equities with alacrity, despite the lack of passage of tax reform by the Trump Administration. Their enthusiasm for US equities has been boosted by the declining costs of passive investment strategies via exchange traded funds.
The tendency of retail investors to ignore investment orthodoxy means that basic valuations are being ignored and that the current uptrend to US equity prices could be somewhat resilient. The ultimate peak will be determined by how much slack remains in the economy.
During the late-1990s, investors made the crucial error of always equating productivity growth with profits expansion, thereby producing capital misallocation. The tightening labour market eventually produced rising unit labour costs that eroded corporate profitability, something which investors could not keep ignoring.
Prior periods when the unemployment rate has been below current levels were associated with economic overheating attributable to military intervention in Asia. Both periods saw rising equity prices due to P/E multiple expansions before the eventual arrival of recession due to Fed tightening.
Historically, military intervention typically produced economic overheating by diverting labour resources away from civilian deployment, but technological advances no longer produces this environment. As long as the Fed continues to embrace a Goldilocks Scenario then the risks of excessive Fed tightening remain manageable.
DeSaque Macro Research Limited was formed by Said DeSaque in April 2012 with the intention of delivering independent global macro investment insights and new thematic long-term ideas to investors, along with an agnostic opinion of the markets.
Said DeSaque has over 29 years of experience working as a professional economist in financial services, primarily based in London. His working role has involved extensive travel around the world, bringing him into contact with investors of different cultural backgrounds and investment requirements. Prior to establishing DeSaque Macro Research, Said held positions as Senior Economist and Investment Strategist at US banks Robert W Baird and William Blair. He began his career as a graduate at PaineWebber in 1986, where he became Head of the London Economics Department in 1996. This role allowed him to engage with senior investment professionals, alongside regulators and provided a unique perspective of market intelligence at work.
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