So what happens next?
The piece of the puzzle that the world is now waiting on with bated breath is the next interest rate move from the US Federal Reserve (the Fed). Being the world’s largest economy (just!), the US has to think about more than just its own needs when determining whether or not to raise rates. The decision will have flow on effects throughout developed and emerging markets.
Last December, we saw the first rise since the global financial crisis. At that time, economists generally were predicting another two or three rises this year. Now that number looks less and less likely, especially after downgraded global growth forecasts from the International Monetary Fund and an intensely rocky start to the year in global markets.
Given the strengths in the US employment market, many believe we should see at least one more rise in 2016 – but then again, probably not before the UK’s Brexit referendum in June, as the Fed will want to see the outcome of that vote on markets before potentially further rocking the boat.
When they eventually do raise rates (and eventually they must), it may be the trigger many analysts have been worried about for shares prices to falter. One of the main reasons the US market has remained so popular over the last couple of years, despite growing concerns around its high valuations, is that nothing else has looked that appealing either.
With interest rates around the world at all-time lows, or indeed negative, traditional ‘safe haven’ assets like government bonds have been shunned in favour of the largest, most stable stocks on the S&P 500. These companies have earned the moniker ‘bond proxies’ as investors increasingly treat them as a ‘safe place’ to park cash, rather than a share market investment.
But if the income on US treasury bonds, for example, were to start rising again in line with rates, we could expect to see money flow out of shares. If corporate earnings don’t provide a good enough reason for investors to remain enthusiastic, a whole lot of people may suddenly start to wonder exactly what it is they’re left holding. Cue sell-offs.
A final hesitation on the horizon right now is of course the upcoming federal election. Campaigning so far hasn’t really made much impact on the stock market I would say, but now we have the candidates for both major parties more or less locked down, we might start to see caution creeping in. With the rather extraordinary happenings in the political sphere this time round, it’s safe to say the US could move in two drastically different directions depending on the November 8th outcome.
Businesses that were considering new ventures may well sit the next few months on the sidelines, while investors likewise hedge their bets in offshore markets.
What is the best way to buy into the US?
As I said upfront, though, America still looks bigger, better and shinier than many other options – especially if you’re a long-term investor. And once you know the themes, there are some exciting ways to play it.
Despite their tendency at the moment not to reinvest for growth, US companies are generally higher quality than the rest of the world when you look at return on equity. And after a couple of years of rising steadily, the US dollar has fallen against a basket of major currencies over the past few months, which is good news for both exporters and US companies bringing home profits earned abroad.
The Elite Rated Brown Advisory US Flexible Equity is one fund that has consistently beaten the S&P 500 over long periods of time. With decades of industry experience, its two co-managers look for medium to large companies they consider undervalued with room for share price recovery. This gives the fund good growth prospects and it has performed well in both up and down markets.
Another fund that is of interest for those who want to invest outside of the FANGs is the Elite Rated Schroder US Mid Cap. Its manager, Jenny Jones, has run the fund successfully for 11 years and has proven herself time again with her ability to pick winning stocks. The fund holds up well in tough markets, aided by Jenny’s disciplined approach to diversification; it holds a mix of “steady” less cyclically sensitive stocks, undervalued businesses, and businesses that have hit rock bottom and are in “recovery mode”.
The Elite Rated Legg Mason ClearBridge US Aggressive Growth fund also stands out for its concentrated portfolio of stocks. This means that the two managers pick companies they have a high conviction will beat the S&P 500. Their top ten holdings typically make up 50% of the total portfolio. This approach is backed up by the quality of the supporting analyst team and their extensive research, often monitoring companies for years before investing.
*Google Finance, AAPL stock price, 26/04/2016–18/05/2016, accessed 18/05/2016
**Google Finance, AAPL stock price, 19/05/2015–18/05/2016, accessed 18/05/2016