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US Stock Market update – the impact across the pond

Joseph Hill, Investment Analyst, explores the effect of the coronavirus pandemic on the US stock market so far.

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.

After months of frustration at the inaction of the US Federal Reserve (Fed), despite three rate cuts in 2019, Donald Trump can surely no longer level the same accusation now.

On 3 March we saw the first rate cut outside of a regularly scheduled policy meeting since the financial crisis. The Fed cut interest rates by 50 basis points to a target range of 1%-1.25%. And in response to the evolving risks to the economy posed by the coronavirus outbreak, we’ve since seen a further emergency rate cut to a target range of 0%-0.25%. This was combined with a plan to inject $700bn of new cash in to the financial system to increase liquidity and help shore up the economy.

The Fed expects to maintain this target range until it’s confident that the economy has weathered the economic impact of the coronavirus pandemic, and is on track to achieve its maximum employment and price stability goals.

It’s clear that efforts to contain the spread of the virus, such as imposing travel restrictions, cancelling public events and closing restaurants and bars will dent economic growth in the short term.

In order to sustain the economy through this period of uncertainty, strong monetary action (like reducing interest rates) needs to be combined with a co-ordinated fiscal response (changes to taxes and spending) from the US Federal Government.

It’s estimated that almost 30% of American workers have no paid sick leave from their employers and more than 30 million Americans don’t have health insurance. These figures highlight the potential need for government support for individuals as well as companies in order to avoid an economic downturn.

Dealing with the spread of coronavirus in the US will probably be complicated by the fragmented private healthcare system. Private health companies don’t have to keep spare capacity, which in an outbreak might result in shortages of beds, supplies and workers. There are just 45,000 intensive care unit beds available across the country.

Which sectors have suffered the most?

Before the coronavirus outbreak, growth expectations for American companies for 2020 were higher than much of the rest of the world. Unfortunately, those market expectations for measures like revenue, earnings and dividends now look increasingly unrealistic, which has resulted in a big impact on share prices.

National policy to slow the spread of the virus relies on consumers making big changes to their lifestyles. This means avoiding restaurants, cinemas, sports stadiums – the list goes on. It’s led to a drop in demand, with some businesses choosing to close through the period of uncertainty. It’s going to hurt sales revenues, meaning some businesses might not be able to pay staff their usual wage for a while.

If households have less to spend as a result of a drop in income, it can reinforce the cycle of falling demand. At the moment it’s difficult to estimate the effect that this could have, but you can see below how some of the major US sectors have fared so far since stock markets began falling around 20 February this year.

Chart showing performance of different US sectors

Scroll across to see the full chart.

Past performance isn’t a guide to the future. Source: Thompson Reuters to 19/03/2020

The oil & gas sector has been hit the hardest, after a dispute between Russia and Saudi Arabia over oil production sent the oil price crashing.

The banking sector has also been hit particularly hard as the US Federal Reserve cut interest rates twice in two weeks. Interest payments on loans are a big source of revenue for banks so lower rates aren’t good news. And any disruption to household income could see a spike in mortgage default rates.

Although not as affected as oil & gas and banking, it’s also been a tough time for technology stocks. They’ve had to deal with disrupted supply chains due to the temporary closures of Chinese factories. There’s also the expectation that demand could fall if consumers are tight for cash. Some sectors have held up noticeably better so far over this short period, like healthcare and telecommunications, although they too are still in the red.

Like most markets around the world, the US market has suffered some heavy falls over the last few weeks. But the US stock market is home to some of the world's most well-known companies and has leaders in almost every industry from technology to transport.

Market shocks like this can be a good time to check if your portfolio still matches your attitude to risk. By holding investments with different drivers of returns you could reduce the chances of them all performing the same way. But all investments can fall as well as rise in value, so you could get back less than you invest.

This article isn’t personal advice. If you’re not sure what to do, please ask for advice.

Wealth 50 Review

Legg Mason IF Royce US Smaller Companies

When looking for an actively managed fund focused on the US, we tend to think investing in smaller companies is where fund managers can add the most value. The Legg Mason IF Royce US Smaller Companies fund, managed by Lauren Romeo, currently features on our Wealth 50. The fund’s made good returns over the last five years but hasn’t managed to keep pace with the broader US market, and has lagged behind its Russell 2000 benchmark. Investors in the fund have gained 38.0%* compared with 55.3% for the Russell 2000 index.

While this is disappointing compared to the smaller companies index, it’s important to remember the fund offers something quite different with its focus on undervalued investments. The benefits of Romeo’s style came through in the second half of 2018 when markets fell. The fund lost money, but not as much as its benchmark.

We’ve seen this again during the coronavirus-related market volatility, with the fund holding up a little better than its benchmark from 20 February to 18 March, suffering a 25.9%* fall, compared with 29.3% fall for the Russell 2000. This is a very short timeframe to compare performance though, and isn’t a guide to the future. Smaller companies are higher-risk than their larger counterparts.

Annual percentage growth
Feb 15 -
Feb 16
Feb 16 -
Feb 17
Feb 17 -
Feb 18
Feb 18 -
Feb 19
Feb 19 -
Feb 20
Legg Mason IF Royce US Smaller Companies -5.9% 44.1% -3.6% 6.2% -0.7%
Russell 2000 -5.7% 52.4% -0.2% 9.4% -1.0%

Past performance is not a guide to the future Source: *Lipper IM to 29 February 2020.

More on Legg Mason IF Royce US Smaller Companies including charges

Legg Mason IF Royce US Smaller Companies Key Investor Information

Legal & General US index

The fund aims to track the performance of the FTSE USA Index and invests in more than 600, mostly large, American companies. It’s run by Legal & General who have over 25 years' experience of managing index funds. Few active managers have consistently performed better than the broader US stock market, so we think this could be a great way of investing in larger US companies while keeping costs down.

This fund invests in each company in the FTSE USA Index in proportion to each company’s size, so the bigger the company, the bigger its impact on the fund. Smaller businesses that make up a very small part of the index are sometimes not held in the fund, as they can be harder or more expensive to buy and sell. This helps to keep costs lower.

The fund’s tracked the index well over both the short and longer term, and we think it’s a great option for low-cost exposure to the US stock market, although past performance isn’t a guide to the future.

Annual percentage growth
Feb 15 -
Feb 16
Feb 16 -
Feb 17
Feb 17 -
Feb 18
Feb 18 -
Feb 19
Feb 19 -
Feb 20
Legal & General US Index 3.2% 38.6% 6.9% 6.8% 8.5%
FTSE USA Index 3.1% 40.5% 5.9% 8.4% 12.9%

Past performance is not a guide to the future Source: Lipper IM to 29 February 2020.

More on Legal & General US Index including charges

Legal & General US Index Key Investor Information

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.

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