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  • Investing in the US – is there opportunity across the pond?

    US Flag graphic

    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

    At the start of the year, one of the greatest investors of all time, Warren Buffett, said to investors in his annual newsletter to “never bet against America”. Buffett pointed to the country’s breath-taking economic progress, despite some severe disruptions. Since then, a shock recession has gripped the US market, casting doubt over how the economy will cope. But for many, the long-term case for investing in the US remains intact.

    Here’s a closer look at how the US economy’s shaping up, what could be next, and opportunities on offer.

    This content isn’t personal advice, if you’re not sure what’s right for you, seek advice. All investments fall as well as rise in value, so you could get back less than you invest.

    Kathleen Brooks is Founder of Minerva Analysis, a market analysis company. Hargreaves Lansdown may not share the views of the author.

    Recessions, opportunities and what could be next

    The US economy plunged into a shock recession in the second quarter of this year. On face value, this suggests the US economy is on its knees, and is underperforming other major economies, including Europe, the UK and many parts of Asia.

    However, aside from the Gross Domestic Product (GDP) reports themselves, there are powerful indicators that suggest the US economy isn’t in as bad shape as the headline figures suggest.

    Dissecting the GDP report

    The technical definition of a recession is two quarters of negative growth. The US GDP reports for the first and second quarters of this year were -1.6% and -0.9%, respectively. This is a hefty slump for an economy the size of the US.

    However, when you dig into the numbers, the weakness in the US economy is not as clear cut as you might think. The Bureau of Economic Analysis think the reason for the decline in the second quarter was down to a decrease in company investment spending, residential fixed investment and lower government spending. There were some bright spots – an increase in exports and a boost to consumption.

    Looking a bit deeper, the decrease in company inventories was led by a decline in autos, however, this comes after strong sales in 2021, so a slowdown is to be expected.

    Likewise, the decrease in non-defence government spending was due to the sale of crude oil from the strategic petroleum reserve, rather than budget department cuts.

    This shows that some of the reasons for the decline in US GDP was down to technical factors. This has already had an impact on US headline inflation. It retreated to 8.5% in July from 9.1% in June, which is lower than inflation rates in the Eurozone and the UK.

    What GDP doesn’t tell us about an economy’s strength

    GDP gives a narrow view of the health of the US economy. For example, it doesn’t include a measure of employment. It also doesn’t look at the micro-data, like actual retail activity on the ground.

    The US Non-Farm Payroll report for July saw jobs increase by 528,000. Since the start of 2022, the average monthly Non-Farm Payroll job creation was 470,000. The total number of jobs created in the US so far this year is 3.29 million. This certainly isn’t a sign of a down and out economy.

    Although more timely economic indicators, including the preliminary S&P Global August PMI report, showed that US companies had scaled back their hiring efforts in August, this isn’t a cause for concern yet. The US unemployment rate was 3.5% in July. This shows there is room for a slowdown in employment growth and an increase in the unemployment rate, without wreaking havoc on the US economy.

    This isn’t a repeat of 2008

    The current ‘recession’ isn’t directly comparable to the financial crisis in 2008. For example, in the aftermath of the financial crisis, US unemployment peaked at 10% in 2010. During the current slowdown, there’s significantly less stress in the labour market, and there‘s room for employment growth to slow further as the Federal Reserve tries to tame inflation.

    There are other notable differences this time, including the rate of bankruptcies in the US and the spread between higher-risk high yield bonds and Treasury bond yields. The bankruptcy rate in the US fell by 24% in 2021 compared with 2020. While this isn’t the timeliest indicator, it does suggest US individuals and businesses weren’t in financial stress coming into this recession.

    US unemployment rate

    Scroll across to see the full chart.

    Source: U.S. Bureau of Labor Statistics, 31/07/2022.

    Recession risks and high yield bonds

    In 2008, financial markets were at risk of collapse, which caused the credit crunch and led to a deep recession and soaring unemployment. This time, there’s less financial stress. A good way to measure this is by looking at the low number of bankruptcies and the ICE/ BoA High Yield Index Option Adjusted Spread.

    Towards the end of August, this spread was at 4.78% and has been declining since reaching a high of 5.87% in June. In 2008, the high yield bond spread with Treasuries surged to nearly 20%. The high yield bond index includes US companies that are below investment grade quality. Recent data suggests that companies with the lowest credit quality in the US aren’t in distress, even though the US Federal Reserve (Fed) are hiking rates so aggressively. Again, this doesn’t support the case that the US is in a typical recession.

    An atypical recession

    So, if the US is not in a typical recession, what type of recession is it having?

    This is a recession caused by a global inflationary shock, and the damage inflicted by a fast and aggressive pace of rate hikes from the Fed. Hence why this recession has mostly hit sectors of the economy that are sensitive to interest rates increases, notably the consumer and the housing market.

    The data on the housing market is especially bad. For example, Housing Starts saw a 9.6% monthly fall in July, and are 8.1% below the July 2021 level. After a boom in housing demand during 2020 and 2021, demand is weakening at a fast pace. House prices could suffer steep falls in the coming months.

    The Fannie Mae Home Purchase Sentiment Index can be a good indicator of how the housing market is faring. The index fell 2.0 points in July, to 62.8, its lowest level since 2011, and well below the historic high set in 2019. Only 17% of respondents said that now is a good time to buy a house in the US. Sentiment in the housing sector will likely remain weak for as long as the Fed continues to hike interest rates.

    Fannie Mae Home Purchase Sentiment Index

    Scroll across to see the full chart.

    Source: Fannie Mae, 31/07/2022.

    Green shoots of recovery

    For most of this year, consumer and business sentiment has been at historic lows, as inflation continues to bite personal and business finances. This is hardly surprising as rising gas prices along with higher interest rates is a toxic mix for consumption. However, as gas prices have been in retreat in the US, there’s been a notable pick up in sentiment.

    The University of Michigan Consumer Sentiment Survey rose in August, and all components of the index moved higher. The year-ahead economic outlook also moved substantially higher and is now above its average reading during the second quarter.

    This has been reflected in actual retail sales data. Sales data from Walmart were higher than estimated, with Walmart noting that traffic to stores had picked up in July and August.

    The S&P Global preliminary PMI survey for August, also showed some green shoots of recovery. There was greater overall optimism for the 12 months ahead, even if sentiment remains weak. Overall sentiment is recovering at a faster pace in the US compared to elsewhere, because the country is largely self-sufficient when it comes to energy. That means it’s unlikely to experience black outs this winter, unlike Europe.

    The price of most energy and commodities is also priced in US dollars. So the US economy isn’t exposed to rising energy prices when its currency is weak, unlike in the UK or Europe.

    What’s next for the US?

    In the current environment, the type of recession that you have matters, as does the future outlook. The US is experiencing a recession in the technical sense because inflation is rising, and interest rates are moving higher to combat this. However, headline inflation is likely to fall faster in the US, and this could have a positive impact on the US economy in the future.

    The fact that consumers and businesses are more positive on the outlook for the US economy in 12-months’ time is also likely to help boost it towards the end of this year and into 2023. Even if there’s a double dip recession in the US, it will likely be milder than in Europe.

    So, there could well be blue skies ahead for the US economy and with that comes opportunities for investors.

    The long-term case for investing in the US

    The US stock market has been battered by the global sell off in riskier investments, like shares, that started at the beginning of 2022. The main blue-chip US index (the largest 500 US companies) is down nearly 15% since the start of the year.

    On paper this looks like a frightening decline, the fact the US has led the move lower is even more of a concern for some investors. However, there are unique factors at play when it comes to this year’s downturn in the US stock market. While these are worth watching closely, in my view the US offers great opportunities and the recent sell off only stresses that.

    The case in favour of the US stock market speaks for itself. Blue-chip US companies make up nearly 70% of the MSCI global index of blue-chip companies. This compares with a near 5% for the UK, 6% for Japan and 13% for other regions. As you can see, no other region comes close to the US. This leads to the question, why is the US stock market so coveted by global investors?

    There are three main reasons for this. The first is its size, the second is the fact the US blue-chip index is the most traded stock market in the world and the third reason is that it has the benefits of diversification.


    Looking at the size of the US blue-chip index first, its total market capitalisation, which is the value of all the companies that are included in the index, is a whopping $31.9trn. This was just over $40trn at the start of 2022.

    However, even with the large drawdown in the index, the main US index is still bigger than its developed world rivals. For example, the market capitalisation of the FTSE 100 is less than £2trn, while the market capitalisation of the Xetra DAX in Germany is like that of the FTSE 100.

    The US index is significantly better capitalised than all its rivals put together, it has the single largest concentration of wealth in the world.

    Trustworthy and easy to trade

    This is one of the most attractive features of the US. The main blue-chip US index is also the most traded in the world, and it’s easy to access.

    It’s considered transparent, for example, all companies listed on the US blue-chip index need to report certified results to the public every quarter. While this is common for lots of indices, for the most part, people trust the data issued by companies listed on the US blue-chip index. This is especially true when you compare the quality of data in some other regions of the world.

    Diversification on offer

    The US also offers impressive diversification of companies and sectors.

    Just over half of the US index is made up of the technology sector (28%), financials (14.5%) and the healthcare sector (14.25%). Whereas just over half of the FTSE 100 is made up of financials (17.82%), consumer staples (17.9%), energy (9.5%) and materials (13.4%).

    On first look, the FTSE 100 looks like it’s more diversified because its largest sectors are more numerous than the US index. However, US tech includes a huge variety of companies, including Apple, Microsoft, Google parent Alphabet, Facebook owner Meta and Amazon.

    This small selection of tech companies in the US include e-commerce, search, social media, cloud computing, hardware, and software. These are some of the biggest companies in the world and are the cutting edge in technological innovation. The US is a bet on the future of innovation and a digitalised economy of the future.

    It’s also worth pointing out, that several large British-born tech companies have chosen to list outside the UK in recent years, with many choosing the US, or being bought by US rivals. For example, Equinix bought Telecity, a data centre company, back in 2015, and Microsoft bought predictive-text company SwiftKey in 2016.

    Some of the US’s largest tech companies are in part driven by British innovation. The fact US companies have gobbled up some of the biggest stars in the UK tech sector is also a sign of their relative strength and financial firepower.

    It’s worth remembering, during the summer stock market rally, the main US index staged a stellar rally, even if it didn’t manage to regain all of 2022’s losses. Tech stocks led the US market higher during the summer months, although stocks have sold off again at the end of August.

    This is a positive indicator, tech stocks have had a huge shake out, and the strongest companies have survived. This could be a sign of things to come with the tech sector leading the US market back to health down the line.

    Thriving foreign demand for US assets

    There have been many naysayers who have called the end of US dominance in the global economy. However, even though China is biting at the US’s coat tails in terms of the overall size of its economy, it still hasn’t derailed the US blue-chip index as the king of the global stock market.

    Looking at flows into and out of the US, overall net foreign purchases of long-term US securities increased by $132 bn in June. When foreign citizens buy more US assets, this is a bullish sign for the US.

    Saudi Arabia’s purchases are worth watching. It has increased its purchases of US assets by $45bn in three months. This suggests that Saudi’s bumper oil revenues are flowing back into the US – a sign of confidence in the US stock market. If flows of this size continue, it could help the US stock market to turn a corner after this year’s sell off but of course there are no guarantees.

    Annual total flows into US long-term securities

    Scroll across to see the full chart.

    Source: US Treasury, 22/06/2022.

    Some of these figures are negative. That’s because they measure the difference between foreign assets owned by US citizens, and US assets owned by foreign citizens.

    Historically, the US blue-chip index has delivered consistent returns since its inception in the 1920s. This comes even though there have been some deep bear markets, like the one that we’re currently experiencing.

    Bull markets have historically beaten bear markets in the US, and this is what has driven the long-term gains in US stocks. The US market tends to bounce back after a year of below-trend growth. Of course, that doesn’t mean it will happen again, past performance is not a guide to the future.

    Over the long term though, it can be a great option for investors and that’s not likely to change anytime soon.

    This article is not personal advice. If you’re not sure what’s right for your circumstances, please seek advice.

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.