BLOG: Joe Biden one year – Do US equities offer any value?
His one-year report card is decidedly mixed – this is reflected by his approval rating falling from 56% to 42%**. To put that into context, Donald Trump saw his rating fall from 45 in his inauguration day to 35% in his first year in office**.
In truth, it’s not been the easiest time to take on the world’s biggest job and Biden made it clear the pandemic was his top priority.
The economy has been fairly robust in the face of Covid, with figures from the Bureau of National Statistics showing total unemployment remains lower than its’s pre-pandemic levels. As Schroders US Mid Cap manager Bob Kaynor points out, the US economy is actually growing at a structurally higher rate than before Covid-19, driven by consumer spending, government infrastructure investments and corporate capital spending***.
The infrastructure investment is courtesy of a $1trn infrastructure investment bill in November 2021, with a further $1.75bn ‘Build Back Better’ to come. The latter is a strong attempt to boost growth through fiscal policy – essentially spending their way out of trouble by providing jobs. In addition, one of Biden’s first acts was to ensure the US formally re-joined the Paris Climate Agreement, with the US committing to reaching net zero by 2050.
What does the outlook for 2022?
Figures from the International Monetary Fund project growth of 5.2% in 2022 for the US economy – higher than almost every other advanced economy^. Unfortunately, it is not as simple as that for investors, as 2022 poses a bit of conundrum – growth is likely to be strong, but so is inflation – which hit a 40-year high of 7% in the US recently.
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. 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.
Perhaps the biggest challenge is policy error from the US Federal Reserve – raising rates either too early or too aggressively – the latter happened in 2018 when the market sold off some 25% as a result. In my view inflation will settle down in the first half of this year – but it is unlikely to reach the muted levels we saw previously.
Which brings me to my final point – valuations. I have been wrong about the US for a number of years, believing the stock market to be too expensive. This is particularly true of the big technology and internet stocks (Meta, Amazon, Apple, Netflix, and Alphabet) which have grown exponentially in size. You can’t rule out these companies continuing to grow, but they are anything but cheap – so you have to pay for it. What you also have to remember is that when stocks are expensive it takes very little to unsettle them – and that has been the case in the past few weeks when growth and technology stocks have been hit hard.
I think from here you are going to see a lot more dispersion in returns – that could benefit a number of areas like value managers or those in the small and mid-cap space, where returns are more cyclical. Ultimately, the US is the largest market in the world – so there will always be great opportunities. Below are four active funds for investors 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.
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.
Schroder US Mid Cap
Manager Bob Kaynor invests in small and medium-sized US companies. He says cyclical sectors make up more than half of these firms in the US, something he feels will see this segment of the market benefit strongly from the ongoing economic recovery.
*Source: FE fundinfo, total returns in sterling for the S&P 500, 20 January 2021 to 20 January 2022
***Source: Schroder Outlook 2022 – US equities
^Source: International Monetary Fund – World Economic Outlook, October 2021
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius’s views are his own and do not constitute financial advice.
Darius McDermott is managing director of Chelsea Financial Services and FundCalibre