Is there any value in US equities?
Having experienced the fastest bear market in history, when it took just 22 trading days for the US...
2020 started strongly for the US. Its stock market had led a ten year-bull market and continued to make new gains, with the S&P 500 (the index of the US’s largest 500 companies) reaching an all-time high of 3,386 on 19 February 2020*.
Then the world woke up to the fact the Coronavirus was a global pandemic and stock markets around the world plummeted. The S&P 500 fell 33% to 2,237 over the next 33 days**.
It has since recovered some ground and is currently around 2,944*** – more than 10% off its peak. Smaller companies fell more – down more than 41%** peak to trough and are still more than 20% down on where they started the year^. US tech stocks, however, are back to 1 January levels already^.
We asked four fund managers their views on the US stock market today and the opportunities to be found:
“We liked the US consumer last year, but we are now underweight the sector because the outlook changed on a dime. Healthcare has been very strong – led by biotech companies which is unusual, because the industry is almost entirely dependent on capital markets for growth. But it’s been the second strongest sector behind utilities, mainly due to drug discovery potential. And ‘virtual anything’ is working in this market.
“But for a sustainable recovery in equities, I think we need more clarity on earnings – something we won’t get that at the moment because the outlook is so uncertain. Even Kimberley Clark, which produces toilet rolls amongst other things, pulled its guidance recently.
“That said, there are a tremendous amount of stock specific opportunities at the moment: opportunities to upgrade the portfolio and buy higher quality companies at cheaper prices. It’s a wonderful time to be planting the seeds for the future and we’ve been actively doing this. We eliminated 13 positions and added 5 new ones. Action today will bear fruit next year.”
“The depth and length of recession are still unknown, but depth is of less consequence than duration in my view. The greater fear is that we come off lockdown too soon and have another lockdown in the autumn going into winter. “
“In January and February we were doing nothing but selling as the markets were ripping higher. We had stocks hitting price targets, so our cash position built up to 11% of the fund. That meant we had money to buy into the market falls and we’ve added to existing holdings and bought new ones – companies that we’ve been admiring for years and years, but never had the opportunity to buy because they were simply too expensive.
“For the last couple of years, we haven’t had any holdings in smaller companies – you don’t want to own small caps coming into a recession because they do badly. And that’s exactly what’s happened. The Russell 2500 small cap index has massively underperformed the S&P 500.
“But what we have always said to clients is that at the depths of the next recession, we will be significantly adding to our small cap weighting within the fund, because that’s the time when everyone hates small caps that you get the best opportunities to buy some wonderful companies at great prices. And you know, we’ve really been taking advantage of that. I don’t think we’ll get back down to the lows that we saw a month ago.”
“The fund was positioned for an improving economy at the start of the year. When that changed, we focused first on the balance sheet strength of the companies we held, cutting those with too much risk, and then we chopped off the tail of the portfolio so we could have conviction in a smaller number of holdings.
“Today there is an Interesting valuation opportunity for Russell 2500 companies vs the S&P 500 – small and mid-caps are cheaper than large caps and compared with their own history.
“Cases of the virus seem to have peaked, government responses have peaked, and we don’t expect the market low of 23 March to be retested.”
“What we did first off was cut any holdings where we had balance sheet risk. Then we thought about our framework for the crisis – which companies to own that are boosted by the virus – and finally what companies we wanted to own coming out the other side.
“A stock market will generally start doing well when a situation stops getting worse. For this situation to stop getting worse we needed governments to respond (they have), then we needed more testing and treatments (we are seeing some of this), and thirdly, cases needed to peak around the world. I think we are through that now and markets have begun to rally.
“The US economy has been strong and unemployment exceptionally low. It went into this crisis from a position of strength I think, when we move out of this, there’s no reason why we can’t get back to a stable economic environment in the US.”
*Source: Yahoo Finance
**Source: FE Analytics, total returns in US dollars, 19 February to 23 March 2020, Nasdaq, S&P 500 and Russell 2500 indexes.
***As at 29 April 2020
^ Source: FE Analytics, total returns in US dollars, 1 January to 28 April 2020, Nasdaq, S&P 500 and Russell 2500 indexes.