Biden: the US stock market one year on

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.”

His colleague, David Harrison, manager of Rathbone Global Sustainability fund, added: “Whilst there has been some disappointment at the inability to pass the ‘build back better’ program into law to date, the US has once again become engaged in the global climate debate – a complete reversal from the Trump years in office. The importance of this cannot be under-stated.

“Whilst we are still relatively early in the US sustainability journey and we do need to go faster, we have seen our investment opportunity set expand significantly in the past 12 months.”

And what of the immediate outlook for the stock market, which has fallen into negative territory in 2022?

“I have been wrong on the US for a number of years, believing it to be expensive,” commented Darius McDermott, managing director of FundCalibre. “The market is still expensive by historic standards. The S&P 500 is trading on around a 29 trailing PE ratio**.

“However, earnings grew significantly faster than the market last year at 45%***. So arguably the market is becoming cheaper, not more expensive.”

S&P 500 PE Ratio

Source: multpl.com

Will inflation stall returns?

US inflation hit a 40-year high this week coming in at a huge 7%. Minutes from the Federal Open Market Committee’s December meeting had already revealed it is getting more concerned about inflation and the probability of a March interest rate move is now surely a done deal. Goldman Sachs and Deutsch Bank are also now suggesting four 0.25% hikes this year. As a consequence, real yields have rallied, and equities have wobbled.

The rising cost of energy is a big driver of the ramp-up in inflation in recent months and this energy squeeze is likely to continue into 2022. Brent oil has risen above $80 a barrel once again and worldwide gas prices have been marching higher for some time. This rise in energy prices should abate as the year progresses, with supply chains untangling and economies returning to a greater degree of normality.

However, any conflict in Ukraine would upend energy markets again. The Russian army is massed on the border of its southwestern neighbour, if it invades, the US and EU have made it clear that they would enforce sanctions. That would curtail the gas and oil exports of one of the world’s largest suppliers.

“The Fed has a tough job ahead of it – as do other central banks,” commented Rathbones’ Julian Chillingworth. “We have come through a period of unprecedented change. Governments and central banks have used an abundance of extraordinary monetary and fiscal policy tools to get us through, yet they now must learn how to reverse them without tripping up the economies they are trying to sustain.”

“Coming off a period of very strong, absolute performance for the US equities over the last 18 months, I think we’re now in a similar environment to that which we saw post the 2003 or the 2013 recoveries,” commented Bob Kaynor, manager of Schroder US Mid Cap fund.

“I think we can expect to see a period of more normalised returns, with greater dispersion. And, if my outlook is even in the same zip code of reality, I think that active management in general is going to do very well.

“I think it’s an environment that’s going to favour core and value managers more than growth. We saw fits and starts of this in 2021, but I think we’re going to see a more protracted trend when value outperforms.

“I also think that, as the economic recovery broadens out, small caps will do well because they are generally more cyclical. The S&P is really dominated by tech, telecom, media and the internet. The small cap space is dominated by industrials, materials, banks and the consumer – classic cyclical parts of the market.”

US equity 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 flexible strategy, with 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.

Find out more about all of FundCalibre’s Elite Rated US Equity funds here.

*Source: FE fundinfo, total returns in sterling 17 January 2021 to 11 January 2022
**Source: multpl.com
***Source: CNBC/Factset