The US economy is doing amazingly well, with record-setting job numbers.
That’s the political line President Trump recently told reporters as he looked to highlight the resiliency of the world’s largest economy as it looks to come out the other side of lockdown.
In fairness, the statistics show the statement does have an element of truth to it. We have seen the fastest recovery from a bear market in US equities since the 1930s* – with markets around the world following suit I should add. At the time of writing, the S&P 500 is not far off its record highs, while the economy added some 4.8 million jobs in June – well above analyst expectations after the economy lost over 22 million jobs in March and April when most parts of the US were under lockdown due to Covid-19.
If you came down from Mars and somebody told you we’ve had this economic shock and that by most people’s estimate it’s going to be the biggest recession in almost a century – I’m certain you wouldn’t expect the US economy or stock market to be anywhere near where they are today. There is still so much more bad news to come from the global economy and markets are simply well above where they should be, given we are in a recessionary environment.
Just five or six stocks leading the rebound
But when you look closely, it’s actually just five or six large stocks which are driving the rebound. In fact, a chart from Premier Miton shows that the five largest stocks in the S&P 500 have actually driven the US market for the past 25 years, returning almost 25% on average in that time, while the average stock in the index has risen by less than 10%**.
Clearly, there are factors that favour these large tech companies in the future. For example, you cannot say Amazon will not be in a better place post Covid-19 as demand will grow for online distribution. It’s the same for streaming services – where demand will not fall back to pre-pandemic levels. These companies were all systematically winning before this crisis and the low interest rate environment does give them the potential to continue, but you are paying a big price and I think you may want more diversification from such a large economy.
But it does make you wonder whether the US is as expensive as it looks? Or is there some value in other areas of the market?
What we do know is that in Trump we have a president who will do anything to make sure the US economy continues to flourish – and that means there are likely to be opportunities for small and medium-sized businesses with strong balance sheets at attractive valuations.
US funds to consider
A good option in this space is the LF Miton US Opportunities fund, managed by Nick Ford and Hugh Grieves. The 35-45 stock portfolio uses the Russell 3000 index as its hunting ground and the managers allocate a significant amount of their time to small and medium sized companies, although they will avoid start-up firms.
Another to consider is the Schroder US Mid-Cap fund. The team that runs this fund invests in three types of companies: ‘steady eddies’ or less economically-sensitive companies, which act as ballast in the portfolio; ‘mispriced growth’ stocks, where the team feels the market has not fully understood the firms’ earnings potential; and ‘recovery-type’ situations.
One alternative option is the JPM US Equity Income fund, which targets an above-average income by investing in a diverse range of established stocks. Manager Clare Hart has a wealth of experience and the help of co-manager Jonathan Simon, along with a huge team of analysts, to filter down the whole US market into a portfolio of 85-110 stocks. The fund has a 15% underweight to technology when compared to its benchmark, the S&P 500^.
*Source: JPM, Global Equity Views 3Q 2020
**Source: Premier Miton presentation – July 2020
^Source: Fund factsheet, 30 June 2020
