Could the US stock market rise a further 170% by the end of the year?

With Independence Day almost upon us, we at FundCalibre, decided to have a look and see whether US equity investors have anything to celebrate.

If you go by averages, the answer is yes. Looking back over the past 90 years or so, the average US bull market has lasted 8.9 years with a cumulative total return of 468%¹. The current bull market has lasted roughly 8.5 years and returned 300%².

Views are very much polarised, however. Oppenheimer Asset Management’s chief investment strategist expects the bull run to continue, as more investors come in off the sidelines out of cash and into stocks. JP Morgan and Bank of America, on the other hand, have warned of a ‘collapse’.

Three reasons to be optimistic

1. Economic strength. The US is enjoying its third longest period of economic expansion since 1850 and, despite the IMF cutting its forecast recently due to ‘policy uncertainty’, the economy is still forecast to grow by 2.1% this year and next. Unemployment is low, corporate earnings are strong and, importantly, earnings expectations remain high. Small business sentiment is as high as it has been since 2004.
2. Safe haven. The US dollar is seen as a ‘safe haven’ currency and the economy, whilst not perfect, is arguably more solid than any other in the developed world right now.
3. Plenty of choice. The US is jam-packed full of exciting, entrepreneurial companies – both large and small. It’s also home to a large proportion of the world’s healthcare and technology companies, many of which have products or services that are required, no matter how bad things get. With dividends also continuing to grow, there are still going to be investments worth making.

Three reasons to be cautious

1. Valuations are high. Valuations are now at their second highest in history, with the highest point coming just before the dot com crash of 2000–2001. Many experts say they wouldn’t be surprised if there was a market correction.
2. Rising interest rates. While nobody expects the Fed to raise rates too quickly or by too much, any increase will have an impact. There is a worrying amount of debt in the auto sector, which could become stressed and consumer spending – which is already falling – could slow further. In a land where ‘more spending’ is the ultimate mantra, this does not bode well.
3. Trump. There does seem to be a very concerted campaign to have Trump removed from office – how much progress this will seriously make remains to be seen. But it does add to the uncertainty. Policies are muddled and, to quote a colleague, “the average tenure of senior staff in the White House is now counted by the hour, such is the turnover”. Trump has reportedly warned his chief of staff, Priebus, that he has until 4 July to ‘clean up’ the White House or else. So Trump could be firing another employee rather than firing up the BBQ.

Three funds in which to invest

Brown Advisory US Flexible Equity

Managed by Hutch Vernon and Mike Foss, this fund was launched in the UK in 2014, but a parallel version has been run by Hutch for more than 20 years in the United States. Hutch and Mike use a flexible strategy. Improving businesses with management change offer particular appeal. They invest in a wide universe of US stocks and have a low turnover.

Schroder US Mid Cap

Run out of New York by Jenny Jones and her team of analysts, this fund has a focus on small and medium-sized companies. To help manage risk, stock ideas fall into three different buckets. ‘Steady eddies’ or less cyclically-sensitive stocks act as ballast in the portfolio. ‘Mispriced growth’ are stocks where Jenny feels the market has not fully understood the company’s earnings potential. The last, and smallest, bucket is recovery type situations.

Lazard US Equity Concentrated

This extremely concentrated US fund typically holds no more than 20 to 25 companies, ranging in size from the fairly small all the way through to the very large. It contains the best ideas from across Lazard’s US equity funds. While the strategy was launched in 2003, the fund only became available to UK investors last year. It is genuinely different to the market and has consistently beaten the S&P 500, outperforming in the majority of calendar years since its launch, which is no mean feat.

¹Source: First Trust Advisors LP, Morningstar returns in US dollars from 1926-31 March 2017.
²Source: FE Analytics, total returns in US dollars, 9 March 2009 to 28 June 2017.