Minerd: US Equities Could Rally 20% More

April 07, 2015

The fundamentals for the U.S. economy are as strong as they’ve been since the credit crisis, and more upside in the stock market may be in the cards, Scott Minerd, global chief investment officer at Guggenheim Partners, said. But that doesn’t mean there aren’t more prospective opportunities for ETF investors elsewhere. Minerd told ETF.com what he likes and doesn’t like in a world fueled by accommodative quantitative easing.


ETF.com: Do you think the U.S. economic recovery has been anemic, or are we in good shape? What’s your outlook for the U.S. economy going forward?


Scott Minerd: The underlying fundamentals for the U.S. economy are as good as they’ve been at any time in the expansion. We’re getting a robust increase in purchasing power by wage earners. This reflects the success of the Fed’s policy.


They’ve been focused on reducing the unemployment rate, and we’re starting to see minimum wage increases. We’re going to get some increased growth in wages, especially among low wage earners, who have the highest marginal propensity to consume. That will directly translate into consumption growth, which will help push the economy along, and ultimately be good for U.S. companies.


The one caveat I have is the economic data for the first quarter is likely to come in a lot weaker than people are currently expecting. We’re having a replay of what happened in the first quarter of 2014, where weather distortions caused the economy to slow dramatically in the first quarter. I wouldn’t be surprised to see growth basically go to zero in the first quarter.


Ultimately, given the underlying fundamentals and the underlying strength, the rest of the year will be just fine, and there will be good momentum to go into 2016.


ETF.com: There’s been a growing demand for international stock ETFs in recent months. Do you think the rally in U.S. equities is running out of steam?


Minerd: The valuation of the U.S. market is getting rich. European stocks and some Asian stocks are better values than U.S. stocks. Against that backdrop, I think that if you have money to allocate to equities, you should have a significant allocation overseas as opposed to the U.S.


But as for the U.S., even with earnings coming under pressure from currency translations and the multinationals, and the depressed earnings we’re getting out of energy, we still have room to have multiples expand. I expect over the next 12 to 24 months that U.S. equities will be, on balance, 10 to 20 percent higher than where we are today.


But I could see Europe doing a lot better than that, and certainly places like China, Japan and India have a lot more headroom to run than the U.S. market.


ETF.com: What are the particularly bright spots in Europe today?


Minerd: The big winners for Europe are going to be on the periphery, so Spain, Italy, Portugal, Ireland—those are the better plays. Germany also will benefit as the weakening euro helps to support its export activity, and as other parts of the world continue to grow, we are likely to see those exports continue to grow.


Across Europe as a whole, it’s pretty hard to make a mistake, but, on balance, my preference is for the countries that have been beaten down on the periphery. But I think Germany should be a component of anybody’s portfolio if you’re going to go to Europe.


ETF.com: What’s your outlook on rates? Do you have a view on what the Fed will do next?


Minerd: The Fed really wants to get started raising rates. Originally, my view was 2016 was going to be the start, but recently I have moved it up to September 2015. That really has a lot to do with the comments by various Fed presidents and the chairman [Janet Yellen] herself regarding concerns about asset bubbles.


[James] Bullard in St. Louis has been pretty vocal about his concern that there is a need to make a pre-emptive move to raise rates; [Stanley] Fischer [Fed Vice Chairman] seems to be supporting that also.


But my understanding is that even if it raises rates by 0.25-0.50 percent, monetary policy is still going to be highly stimulative, so it would be better to do a pre-emptive move this year and set the stage for being able to normalize rates in the long run if it were to see an asset bubble take hold.


What it’s trying to avoid is doing anything sudden or extreme. The idea is to do something a little bit early and go slow. If you play that scenario out, I think what you’re looking at for this year is maybe 0.25-0.5 between September and December, and then maybe next year something in the neighborhood of 100 basis points over the course of the year. But as Dr. Yellen has made it clear, everything is data-dependent.



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