Monday 17 January will mark one year of the Biden presidency: a positive one for the US stock market, which has returned 24.1% over the past 12 months, but a less positive start to a term for the President himself.
“President Biden’s first year has ended with his political capital at a low,” commented David Coombs, manager of Rathbone Strategic Growth Portfolio. “It’s proving extremely difficult to achieve Congressional agreement on emissions already, an election promise that is likely to be almost impossible following the mid-terms.”
And what of the immediate outlook for the stock market, which has fallen into negative territory in 2022?
Here, Darius McDermott (pictured), managing director of FundCalibre, takes a look at pros and cons for investors today:
Four reasons to invest in the US
1. Tech: “While the Nasdaq has wobbled in recent days, there is no doubt that the best technology companies in the world are in the US. Tech is dominating our lives more and more and it seems unlikely this will reverse.”
2. Small caps: “The US stock market is also very diverse and dynamic. If the Fed manages to deal with inflation effectively, a broadening recovery should bode well for small and mid-caps especially, which have lagged their larger peers in recent years.”
3. Valuations: “The S&P may have gone up 24% last year*, but earnings grew significantly faster at 45%. Coupled with the recent sell-off, arguably markets are now becoming cheaper, not more expensive.”
4. No bubble: “The exuberance in the market has gone and the bubble in speculative growth stocks has burst, with many down over 50% since Feb 2020 and some down 70% or 80%.”
Four reasons to be cautious
1. Inflation: “Inflation is very high relative to current interest rates and there is now a 90% possibility that rates will rise in March, while Goldman Sachs and Deutsche bank believe there will be a total of four 0.25% hikes in 2022. This is generally bad for the stock market overall. There could also be policy errors.”
2. Valuations: “The market is still expensive by historic standards. The S&P 500 is trading on around a 29 trailing PE ratio.”
3. Profits: “Corporate profit margins are at all-time highs and could be unsustainable. This is destabilising society and increasing political risk. Workers are getting fed up and leaving the workforce. Companies are likely to be forced to pay their workers more going forward which may force profit margins and profits to come down.”
4. Rotation: “If investors believe a market rotation is in the offing – either from growth to value or the US to another region, outflows could impact returns.”
“Overall, I think we can expect to see a period of more normalised returns, with greater dispersion and it may be an environment that favours core and value managers more than growth,” concluded Darius.
“I also think that, as the economic recovery broadens out, small caps will do better because they are generally more cyclical.”
Four funds to consider
JPM US Equity Income
Despite the naturally lower yielding nature of the US market, it has a long history of dividend payments and an increasing number of companies now paying a dividend. This is an option for investors wanting to diversify their income streams.
T. Rowe Price US Smaller Companies Equity
The manager of this fund looks for both growth and value opportunities in the small and mid-cap space, to build a diverse portfolio. He will allow his winners to run as long as he still believes there is a return opportunity.
Brown Advisory US Flexible Equity
This fund has a bias to value but also looking for growth opportunities. The manager mainly seeks out undervalued medium-to-large improving businesses, which reward the fund with good liquidity and decent growth prospects.
Schroder US Mid Cap
A distinguishing characteristic of this fund is that it invests in three different types of growth in a portfolio of small and medium companies: ‘mispriced growth’, “steady-eddies’ and ‘turnarounds’.
Find out more about all of FundCalibre’s Elite Rated US Equity funds here.