Concern over strong dollar, US stock market rally

The US equity market rally that followed Donald Trump’s election as US president could continue, but there are concerns about a bubble emerging.

Dr Michael Power, strategist at Investec Asset Management, says his worry is the combination of a dollar and stock bull market. Ultimately a strong dollar is not good for the US stock market – one could trip up the other.

“My sense is that if we see both of these bull markets continue for another three, six months we could be setting ourselves up for something very ugly in terms of the US market, which was already overvalued even before the election.”

Power cautioned investors to be extraordinarily careful.

“This is what would be called by [economist Hyman] Minsky a displacement event that ultimately leads to a bubble. That is not something we want to contemplate,” he says.

His warning comes just days after Trump’s shock election as the 45^thpresident of the US. Just two of the 100 top selling newspapers in the country endorsed Trump. In the run-up to the election commentators warned that a Trump win would upset markets, but Wall Street was trading at record highs shortly after the election.

Power says there are various reasons the mainstream media got the result wrong. Groupthink prevailed and liberal America just couldn’t contemplate the idea that an angry backlash was building in the heartland of America. Since the year 2000 over 50% of Americans have not seen their real incomes increase.

Most people working in newspapers are college-educated, arguably putting them in a different camp than Trump-supporters.

“They just did not see it coming. It was just the ultimate Black Swan,” Power says.

The surprising outcome has triggered comparisons between the US election and the Brexit vote.

Power says it is all part of a much bigger theme where large parts of the Western world electorate are left behind in the wake of globalisation.

The US election was in many respects an “angry revolt of yesterday’s people who are increasingly lost in tomorrow’s world”.

The worry is how the trend may play out during the big elections in France, Netherlands and Germany next year. Power says the results of the referendum in Italy and the presidential election in Austria in December could spook the commissions of the European Union.

Power says the future of the EU is clouded. Britain leaving the EU is one thing, but Austria is altogether different because if it decided to leave, it would have to leave the Eurozone, which would put a question mark over the future of the Euro as a currency.

“To me that would be a profound economic issue that would really start to rattle markets.”

The new rightwing AfD party in Germany has managed to get around 20% of votes in less than a year while France’s Marine Le Pen could become president next year.

“I think we could see some real shakeups happen in the European Union in the next 12 months.”

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