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The US economy is performing strongly, but has it hit the high-water mark?

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It took more than half a year, but by the start of this week, the benchmark S&P 500 equity index was within striking distance of its record closing high set on January 26, just days before an eruption of volatility sent US stock markets into a tailspin.

The swift recovery and strong performance of US equities has been one of the dominant themes in global markets this year.

It has been all the more remarkable given the plethora of risks confronting US stocks. These include an intensifying trade war between the United States and China, a more hawkish Federal Reserve, concerns about the sustainability of the rally in technology shares which has driven the market higher and, last but not least, the US midterm elections in November, which could help determine whether President Donald Trump is re-elected in 2020.

What is more, it is not just US stocks that are performing strongly in the face of growing uncertainties.

In the second quarter of this year, America’s economy expanded at its fastest clip in nearly four years, buoyed by last year’s US$1.5 trillion tax cut, which has boosted consumption and investment. The Fed’s preferred measure of inflation, moreover, stands at just below 2 per cent, allowing the central bank to keep raising interest rates at a relatively measured pace.

The Fed’s quantitative easing report card is mixed – except for the rich

Not surprisingly, Trump has been quick to take credit for the strong performance of the country’s economy and markets, dismissing concerns that growth and valuations have more or less peaked. In one of his countless self-congratulatory tweets, the president also singled out this year’s plunge in Chinese shares as evidence that his administration is winning the trade war.

There is no question that the US is strongly in favour with investors right now. JPMorgan notes that the global economy has experienced a “unilateral US upturn” since the start of this year as other regions, notably the euro zone and China, have slowed. In the markets, four of the six best-performing assets this year are American, and include the tech-heavy Nasdaq Composite index, the S&P 500 and the US dollar on a trade-weighted basis.

The question is whether this is as good as it gets for US assets and whether investors should already be rotating into other regions, where valuations are much cheaper and where the risks have already been discounted.

When earnings are up, why do investors anticipate a downturn?

Part of the answer lies in earnings. The main reason US stocks have proved so resilient is companies’ stellar growth in profits, flattered by last year’s corporate tax cut. With 80 per cent of firms listed on the S&P 500 having reported second-quarter results, earnings are up 24 per cent year-on-year, the second-strongest growth rate since 2010, according to FactSet, a data provider.

Yet, analysts expect earnings growth to fall to 8 per cent by the end of the first half of 2019.

Investors, however, have yet to price in significantly lower profit growth next year. US equities have not only recouped nearly all their losses since January, tech stocks, led by the so-called FAANG (Facebook, Apple, Amazon, Netflix and Alphabet, parent company of Google) bloc, remain the most crowded trade, according to the latest monthly survey by Bank of America Merrill Lynch.

Tech stock worry and Japanese bond wobbles a risky mix

Put simply, the valuation premium investors are willing to pay to hold US shares is rising again – American stocks are cheaper than they were late last year but are becoming pricier relative to European and emerging market equities – despite increasing uncertainty about fundamentals, as the distorting effects of the tax cut disappear and the economy starts to slow in the coming quarters.

In emerging markets, by contrast, the risks have been priced in – excessively so in the case of China’s battered stock market – which provides a better entry point for investors when sentiment improves. In the euro zone, meanwhile, although earnings estimates have been revised down sharply mainly due to concerns about growth, the absence of a large tech sector could end up benefiting Europe’s stock markets if the FAANGs fall out of favour.

To be sure, the rally in US stocks almost certainly has further to run given the robustness of the economy and the strength of earnings. Yet last quarter’s 4.1 per cent GDP growth rate and 24 per cent growth in corporate profits represent a high-water mark.

The global trading order has bigger problems than Donald Trump

From here on, the investment landscape is likely to get a lot more challenging, particularly if the trade war escalates further.

Trump’s pro-growth policies have been a boon to the US economy and markets, so much so that the president is feeling increasingly emboldened in his trade offensive against China. If the stock market rally continues, Trump is likely to dig his heels in.

US equity bulls should be careful what they wish for.

Nicholas Spiro is a partner at Lauressa Advisory

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Global Slowdown Looks More Likely in Trade Turmoil: Economy This Week

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  1. Global Slowdown Looks More Likely in Trade Turmoil: Economy This Week  Bloomberg
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Fed's Powell still has a chance to save the economy before it's too late, Cramer says

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With a month left until the Federal Reserve’s next widely expected interest rate hike, Fed Chair Jerome Powell is facing a critical juncture that could determine the trajectory of the U.S. economy, CNBC’s Jim Cramer said Thursday.

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After hearing Powell’s remarks in a Wednesday interview with Dallas Fed President Robert Kaplan, Cramer felt that for the first time, Powell was growing cautious about the pace at which the Fed is raising rates. The central bank has said it plans to raise rates once more in December and three times in 2019.

In a question-and-answer session during the interview in Dallas, Powell acknowledged that the pace of global economic growth was slowing, but said it was “not a terrible slowdown.” Earlier this year, Powell said the Fed was “a long way” from neutral interest rates, signaling more hikes to come.

“Kaplan’s questions allowed Powell to walk back his sadly intemperate comments from October, comments that seemed to be almost blithely oblivious to some of the more worrisome data out there,” Cramer reflected on “Mad Money.” “After all, there are degrees of slowdowns that, nonetheless, can cause an awful lot of havoc and cost a lot of jobs, and that’s what we’re on the verge of here.”

And after last night, it became clear that “Powell gets it, too,” Cramer said. The central bank chief is realizing that “there’s another side” to the U.S. economy that is splintering under the dual pressures of higher rates and higher tariffs, he said.

“Is it too late? Yes, if we get four more hikes. Absolutely. No if we only get one and we wait,” the “Mad Money” host said. “Powell knows now that normalizing interest rates isn’t the goal — no one knows what normal is these days anyway.”

Instead, Powell has realized his job is to taper the “end-of-cycle talk” that has been filtering through the stock market and the broader economy and that many see as being tied to his rate hikes and the president’s tariffs, Cramer said.

“We know Powell’s now concerned that we actually could be at the end of the economic expansion. That’s a soft reversal of his earlier position from just one month ago, when he was so wedded to the explosive-growth conceit that he talked about overshooting with rate hikes to stamp out inflation,” the “Mad Money” host said. “The guy’s clearly paying attention to the data now. You know what? That’s all you can ask for.”

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Cramer says CEOs are telling him off the record the economy has quickly cooled

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Company leaders across industries are telling Jim Cramer — off the record — that they’re worried about a slowdown in the U.S. economy, Cramer said Thursday on CNBC.

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“So many CEOs have told me about how quickly things have cooled,” the “Mad Money” host said. “So many of them are baffled that we could find ourselves in this late-cycle dilemma that wasn’t supposed to occur so soon.”

Cramer has been warning investors for weeks about a manmade slowdown in the U.S. economy, fueled by the two-pronged pressures of the Federal Reserve’s interest rate hikes and the Trump administration’s tariffs. Now, high-profile CEOs are worried about growth slowing so drastically that it could actually hurt the economy, he said.

“There are degrees of slowdowns that, nonetheless, can cause an awful lot of havoc and cost a lot of jobs, and that’s what we’re on the verge of here,” he said. “That’s what the markets are saying. That’s what the CEOs are worried about offline.”

The situation reminded Cramer of when, on the cusp of the 2008 financial crisis, his corporate sources confided in him that the Fed “seemed to be out of touch … with what was happening” on Wall Street, he said. That led to his now-famous “They know nothing!” rant blasting the Fed for its lack of diligence.

“I was right,” he said. “I did my best and, at that time, I made a resolution. If I thought we would ever get back into one of these situations again, I promised myself I’d be vocal about what could go wrong, even if I knew it wouldn’t be as serious as the Great Recession.”

Now, with market commentators warning about the U.S. economy being “late” in its cycle, meaning that another recession could be on the horizon, Cramer’s getting vocal.

Weakness in Europe and Asia’s economies isn’t helping, he said, pegging the respective slowdowns to Brexit pressures and instability in the Italian government and China undergoing a mass slowdown tied to President Donald Trump’s tariffs.

If the Fed and Trump stay the course on their policies, the weakness will feed into the stock market as it did on Thursday, the “Mad Money” host warned. The action in shares of Walmart, Home Depot and Macy’s told the story, he said: all three companies recently reported strong quarters, but subsequently saw their stocks plummet on economic fears.

“This end-of-cycle logic raises its head everywhere,” Cramer said. “Everything was good, so good that it can’t ever be better because we’re at the end of the cycle. ‘Late-cycle.’ It’s become almost circular reasoning. The stock can’t go higher because it’s the end of the cycle and it’s the end of the cycle because the stock’s down.”

That, combined with the chief executives’ warnings, told Cramer that stocks can’t possibly be safe while the bearish narrative about debilitating economic weakness reigns supreme.

“If the Fed changes course and says ‘No more rate hikes … next year unless the data gets more positive,’ or if President Trump gets a trade deal with China or even does this kind of truce, then the end-of-cycle proponents may have to change their tune and the market can rocket higher,” he said. “Otherwise, though, rallies like today are going to be used to re-position portfolios because the bears have the late-cycle microphone and they just will not let go.”

Questions for Cramer?
Call Cramer: 1-800-743-CNBC

Want to take a deep dive into Cramer’s world? Hit him up!
Mad Money TwitterJim Cramer TwitterFacebookInstagramVine

Questions, comments, suggestions for the “Mad Money” website? madcap@cnbc.com

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