On 8 November 2016, America went to the polls and elected Donald Trump as the 45th president of the United States.
We’ve spent the intervening 12 months reading 140 character policies, thanking our lucky stars that our average job tenure is 8.5 years, according to UK DataService - rather than a day for certain senior White House press aides - and watching the Dow Jones and S&P rise ever higher.
The US stock market is now expensive, no matter what measure you use. Naturally, investors are questioning whether the good times can continue. If you agree with the law of averages, then the answer is ‘yes they can’.
Looking back over the past 90 years or so, the average US bull market has lasted 8.9 years with a cumulative total return of 468 per cent, according to data from Morningstar (US$ return, 1926-March 2017). Meanwhile, the current bull market has lasted roughly 8.5 years and returned 333 per cent, based on FE Analytics, total returns of the S&P 500 in US$, from 9 March 2009 to 31 Oct 2017.
All of the noise surrounding Trump – and the reaction that is generated by each Tweet - hides the fact that the US economy is actually in pretty good shape, according to Mark Sherlock, manager of Hermes US SMID Equity.
In his view, unemployment figures remain low, business and consumer confidence is high and the Federal Reserve obviously thinks that the economy is in good shape. Hence why interest rates are rising.
The market experienced a shift in sentiment when Trump was elected, according to Mr Sherlock. Despite the fact that many promises are yet to be fulfilled, the new president injected a level of investor confidence that remains intact today.
The fact that Trump is now taking credit for the stock market rises also means that he has a vested interest in making sure the bull market continues. If we see the market or economy stalling, his presidency may follow suit.
Even though the market looks expensive, it could still be driven higher by underlying earnings growth next year, Mr Sherlock says. The companies he meets are enjoying solid and increasing demand for the products and services they provide.
Meanwhile, if the proposed corporate tax cuts go through, it could provide a further boost, particularly for the small and medium-sized companies that the fund owns.
While I’m neutral on the outlook for the US market myself, historically smaller companies outperform when interest rates rise. So if you want a decent chance of making some money out of what could be the final stages of the bull market, I’d suggest mid and small caps are the place.
My opinion? Focus on good active managers, who can add value.
Hermes US SMID Equity invests in US small and medium-sized companies valued between US$ 1bn - $20bn. The manager looks for quality businesses, which have minimum debt and operate in industries with barriers to entry. Alternatively, those that provide products or services that cannot easily be replicated.
He uses an in-house tool (which tests investment rationale for companies even in difficult environments) to look at the quality and consistency of earnings, before assessing valuations.
He will want to see the potential for at least a 20 per cent increase in the current share price. Both before and after investment, the team will regularly travel to the US to ensure they meet and engage with company management.
Against a market notoriously difficult to beat, Mr Sherlock has built an enviable track record, outperforming the average US equity fund and the index consistently over the years.
The team's lower risk approach is grounded by a solid and understandable process with sensible constraints, but enough flexibility to give the fund a great opportunity to excel.
Darius McDermott is managing director of FundCalibre
