US markets: Transition sees property rebounding

Questions such as: why are things so particularly difficult? What is so uncertain? Are we really confident the recession is over? And finally, who is recommending their sector rather than stock by stock?

We have had a strong rally in the market of nearly 5 per cent for the S&P 500, in spite of the fact that negative sentiment is close to its seven-year low. Last year the US market held up very well when you consider all the problems that were thrown at it – for example, the political problems in the Middle East, tornadoes, the downgrading of US debt and the knock-on effect of the troubles in Europe. For the S&P to close the year where it began was quite a feat.

This year sees an election and its outcome is especially important because, as was seen at the debt ceiling debate, the two parties are very far apart in their policies. President Barack Obama will want to raise taxes significantly and spend money on schools and healthcare by cutting the defence budget and putting pressure on productive individuals and corporations. At this point it is difficult to say what the Republicans will do as there is no definite candidate, but both frontrunners seem intent on cutting taxes and government spending.

Housing is again a hot topic, with discussions focusing on affordability and prices. There has been a lot of research distributed to convince us that the housing market is recovering, and it is true that the direction looks more encouraging, but I still think it will take more time, with the potential purchaser less enthusiastic to tie up his capital in real estate than he was. However, the affordability numbers are looking very good, with the cost of buying versus renting at levels not seen since before the 1990s. It takes two years between delinquency and foreclosure, and there is still 11.4 months of backlog. In fact, 17 per cent of homes sold in Chicago in the third quarter were foreclosed homes.

Last week I was in New York visiting analysts, and few were prepared to recommend their sector – they had one or two ‘top picks’ but they were not recommending their peer group as a whole. Bank analysts felt their sector was cheap but that the low-hanging fruit was in the regional banks. Retail has had such a good run that few people found any ‘cheap’ stocks to recommend. Growth outperformed last year and has continued to do so this year, although, if the market gets more bullish on GDP, it could be the turn of value stocks to have their time in the sun.

Low interest rates and low inflation have made dividend stocks attractive. In the past 20 years 42 per cent of the returns on the S&P 500 have been from dividends. This figure is 71 per cent over the past 10 years, a trend we expect to continue.