Four defensive areas for your ISA
The UK officially entered recession on Thursday, 15 February 2024*. Although forecasters don’t ex...
It’s Independence Day this week and, as Americans light fireworks and BBQs, we take a look at the outlook for US equities, to see if investors will have anything to celebrate too.
Now more than 10 years into the current bull market, the S&P 500 (an index representing the US stock market) has returned some 405%* since the stock market bottomed in March 2009. While the returns are lower than the average bull run (468%**), the pace has been much slower: in the past 90 years the cycle has lasted 8.9 years**.
At FundCalibre, we feel the impact of the trade wars is yet to be felt and is a situation we are keeping a close eye on. Momentum is definitely slowing in the US, and company earnings may have peaked, but the labour market is still strong and we are entering the Presidential campaign season, so Trump will be keen for the economy and stock market to keep going a while longer.
1) Supportive Federal Reserve: the US central bank has been steadily raising interest rates over the past three years from a low of 0.25% to 2.5% today. However, in its most recent meeting, the Federal Reserve said that will “act as appropriate” to sustain the economic expansion – in other words, it is ready to provide support [by lowering interest rates] if the outlook deteriorates. This is supportive of US equities and should lengthen the economic cycle.
2) Trade wars: at the time of writing we have a ceasefire – the G-20 meeting in Osaka, Japan was relatively positive in terms of getting both the US and China back to the negotiating table. President Trump seems to have been using his usual tactic of promising the worst to then reach a ‘compromise’ – or get what he wanted in the first place. As always, however, watch this twitter feed…
3) Valuations: the US stock market was looking reasonable value again – briefly – at the start of this year, following the 2018 fourth quarter correction. However, US companies and tech stocks have once again led global markets higher, with the asset class being the best performing so far in 2019. Once again valuations are looking on the expensive side.
4) Plenty of choice: The US has a plethora of exciting, entrepreneurial companies – both large and small. Dividends are also a growing opportunity set. According to the latest global dividend index from Janus Henderson***, all-time quarterly dividend payment records were broken in the United States and Canada in the first three months of this year. US dividend growth has exceeded the global average 70% of the time over the past five years, as company profits have benefited from a robust economy and favourable tax changes.
Two multi-asset fund managers we have met recently are still positive on the asset class. John Chatfeild-Roberts, manager of the Jupiter Merlin Balanced, Growth and Income funds, said that he has been overweight US equities in these funds for about five years. “The stock market has become expensive, but it has also continued to be an engine for investment returns”, he commented.
David Coombs, manager of Rathbone Strategic Growth Portfolio, also likes the US stock market and believes it could be the best performing asset class over the next 1, 3 and even ten years.
*Source; FE Analytics, total returns in US dollars, 9 March 2009 to 28 June 2019.
**Source: First Trust Advisors LP, Morningstar returns in US dollars from 1926-31 March 2017.
***Source: Janus Henderson Global Dividend Index, Q1 2019