Why I'm still bullish on U.S. stocks

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U.S. stocks have been going up for six years now. That's a lot longer than the typical bull market cycle, which usually lasts about 3.5 to 4 years. So how much longer can this upswing last?

There are plenty of reasons for investors to be nervous right now: the Federal Reserve is likely to hike interest rates soon and the strong U.S. dollar is hurting some companies that do a lot of business overseas, among other factors.

peter pham
Peter Pham

But here's why I'm still bullish on America:

The Fed rate hike: Yes, the Fed is likely to raise interest rates in the coming months, but that isn't necessarily a negative for stocks. In the last 20-plus years, the Fed has only had three major cycles of rising interest rates, beginning in 1994, 1999, and 2004 respectively. In each case, the stock market went up in the months before the interest-rate hike, had a short-term correction of roughly 7%, and then started going up again -- with a significant rally after the correction.

Related: Stop crying about Fed rate hikes

A good example to consider is the bursting of the dot-com bubble in 2000. The Federal Reserve began raising interest rates in 1999 leading up to the impending recession.

What is interesting is that at that time, U.S. Treasury Bonds were facing an inverted yield curve, where the yield on short-term bonds was higher than the yield on long-term bonds. The previous nine recessions in the US were all preceded by yield curve inversion, with an average lead time of 14 months.

There are currently no signs of an inverted yield curve in US Treasury Bond yield, meaning that a relatively small, incremental rate hike by the Fed would do little to push towards an inverted yield curve. The Fed will almost definitely increase rates in small increments.

Fed rate hikes, if done incrementally, will not have an immediate negative impact on US equities in the current environment.

Related: How stocks did in previous Fed rate hikes

Consider tech stocks: Another factor to consider is stock market valuations.

On March 2, the Nasdaq hit the 5,000 mark for the first time since its all-time high in the year 2000. As we all know, this was quickly followed by a sharp decline and talk of a bubble. But the Nasdaq is still up over 3.5% for the year, and there are some important factors that differentiate this time from 15 years ago.

First, back in 2000, the Nasdaq was in the midst of the dot-com bubble, and companies trading on the index were clearly overvalued. In comparing the Nasdaq in 2000 to now, we can see that the 12-month trailing P/E ratio for the Nasdaq composite index was around 190 in 2000, while today it sits around 30. This same trend can be seen among some of the largest companies on the Nasdaq, including Microsoft (MSFT), Apple (AAPL), and Google (GOOG), all of whom have more grounded P/E ratios today than they did in 2000.

Related: Tech stocks aren't at bubble levels

Apple in particular, which alone makes up just over 8% of the Nasdaq's market value, appears to be of tremendous value, trading at a forward-looking P/E ratio of around 13. Similarly, Google and Microsoft, who each represent about 4% of the Nasdaq's market value, are trading at forward-looking P/E ratios of 16 and 14, respectively. Together, these three companies account for over 16% of the index.

Low interest rates also allow companies to borrow cheap and create shareholder value via shareholder buybacks that might be more difficult in a high interest rate environment. In 2015 we have already seen share buyback announcements from several big players on the Nasdaq including Qualcomm (QCOM), Gilead Sciences (GILD), and Comcast (CCV), to name a few. These three companies combine to account for nearly 5% of the Nasdaq. I don't see this letting up.

Related: Apple is making regular Americans rich

Improving global economy: Looking internationally also gives more reasons for investors to remain bullish on U.S. equities. An aggressive quantitative easing ("QE") policy is being implemented in Europe, which has resulted in a dramatic rise in equities. For example, the German DAX-30 index crossed the 12,000 threshold Monday after crossing the 11,000 level in January.

Similarly, Japan has stated its intentions to continue an aggressive QE policy in 2015, aiming to inject ¥6.65-trillion a month. With European and Japanese companies doing well, we can expect to see that money trickle into US equities as foreign sovereign funds begin investing into US equities.

In the long term, however, it would be wise to be wary of the DAX and European equities, as equity markets are a poor reflection of economic health, and some leading indicators are showing German exports on the decline.

Related: This is the best performing stock market in the world

Strong dollar: Even the surging U.S. dollar probably isn't as bad as some claim. In the days of globalization and the ease of outsourcing and cost cutting, there are countless ways for multinational corporates to cut costs and maximize profits. The concern of a strong U.S. dollar impacting multinational performance is surely overblown, and can easily be addressed by management rather than being cited as an excuse in quarterly reports and conference calls.

Related: There's no stopping the U.S. dollar

Investors should look to maximize current market trends with the dollar and U.S. equities. An effective strategy to do so might be to buy an S&P 500 ETF like SPY and to hold U.S. dollars.

Peter Pham is the managing director and principal at Phoenix Capital, a Cayman Islands domiciled asset manager, and the host of the "The Big Trade Series" podcast.

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