It’s been an interesting year in the US so far. There have been three sizable regional bank failures, negotiations over the debt ceiling extended to the 11th hour, economic data has been mixed, and inflation – although now falling – is still well above the central bank’s target.
But despite all the bad news, the S&P 500 Index is in bull market territory – at least it is in US dollar terms. Since its low on 12 October 2022, the index is up 21.6%*, while the NASDAQ is up a huge 40.4%*. In sterling terms, however, the rise is less impressive at 5.9%** and 21.9%** respectively.
As the US gears up for Independence Day next week, Darius McDermott, managing director of Chelsea Financial Services, asks if investors are celebrating too soon?
What’s behind the stock market rise?
“For much of the past decade, the S&P 500 was driven higher by a handful of stocks – the big mega cap tech companies – but other constituents were at least seeing their share prices rise too,” commented Darius.
“This time round, to borrow a phrase from Brown Advisory, the “Sensational Seven” of Apple, Microsoft, Amazon, Google, Nvidia, Meta and Tesla, have accounted almost entirely for the market’s positive return. Stock leadership has become even more narrow, which I never thought would be possible!
“Such a lack of breadth casts doubts on whether this bull market is sustainable in my view. I have no doubt that Artificial Intelligence will change the world and is a viable long-term theme, but in the short-term I believe it has been overdone. I certainly wouldn’t be chasing the NASDAQ today after 30%+ gains.
“Instead, we have been taking profits from our US equity exposure in the VT Managed Chelsea Fund range and using the money to buy government bonds.”
What other opportunities are there in the US?
“A number of US equity funds have managed to post strong returns – even in sterling,” continued Darius. Baillie Gifford American, AXA Framlington American Growth, and Brown Advisory US Flexible Equity, for example, are all top quartile in their sector, returning 13.9%**, 10.5%** and 9.9%**respectively.
“But at this point, if I was looking to add to US exposure, I’d be looking at other areas of the US market that are better value – namely the small and mid-caps, which are now priced at historic valuation discounts to large caps and are already pricing in an economic downturn.”
Funds to consider:
Artemis US Smaller Companies
Investing mainly in US small caps, but also with a tilt to mid-caps, manager Cormac Weldon has refined his investment process over 16 years and is one of very few managers that has consistently been able to add value in the hard-to-beat US market.
Premier Miton US Opportunities
This is a highly differentiated active US equity fund, with a greater emphasis on mid-caps than most of its peers. The fund is concentrated with just 35-45 holdings and invests in capital-light businesses with strong reinvestment opportunities capable of compounding over time.
Schroder US Mid Cap
Run out of New York by Bob Kaynor, this fund’s objective is to provide capital growth, primarily through investment in equity securities of small- and mid-cap US companies, which form the bottom 40% of the US market by capitalisation.