Is the party finally over for US equity markets? The region may have enjoyed years of stellar performance, but it has taken one difficult quarter to bring investor worries to life.
Numerous headwinds – from Donald Trump’s trade war with China, to the prospect of interest rate rises – saw the S&P 500 index lose 6.1 per cent from the start of October to December 10, in sterling terms.
The onset of volatility is not a surprise for those who had already fretted that the market looked overpriced, and there’s no obvious sign that 2019 will be any easier for US stocks. The trade war may have cooled somewhat for the time being, but a full resolution of the situation is yet to arrive.
On the same note, US Federal Reserve chairman Jerome Powell has eased his rhetoric about interest rate rises since markets plunged. The central bank may even slow the pace of its hikes, but this only delays, rather than prevents, the tightening of monetary policy.
In any case, the US remains a difficult region to avoid, given it makes up a big chunk of global indices.
US equities also continued to outperform other regions in 2018, on the back of the soaring increases seen before the sell-off that started in October. As of December 10, the S&P 500 was holding on to gains of around 6.5 per cent in sterling terms. On the same date the MSCI World index was up 2.1 per cent for the year in sterling terms. However, when US stocks are excluded from this index, the benchmark is down by 6.3 per cent.
All this means that intermediaries face a difficult decision. While the US market comes with its own problems, and could feel the brunt of any late-cycle difficulties – or even a full bear market – it has continued to drive the best returns. Avoiding it altogether could come with a hefty price.
There are already suggestions that many investors continued to back the market amid the sell-off. In its November survey of global fund managers, Bank of America Merrill Lynch found the US remained the most popular equity region among respondents.
Similarly, Investment Association statistics showed some UK retail investors buying into the slump even as others panicked: a net inflow of around £100m in October made the North America sector one of the most popular groups, at a time when many investors ditched funds in areas such as fixed income.
Difficult hunting ground
Those who maintain conviction in US stocks have another difficult decision to make, because they remain a tough hunting ground for stockpickers. This comes down to two main factors: the efficiency of the market, and its strong performance.
Active managers will argue they can provide better protection of capital at times of volatility than passive funds. But even this argument struggled in the final quarter of 2018: the average IA North America fund lost 7.4 per cent from the beginning of October to December 10 versus the S&P 500’s 6.1 per cent fall in the same period. Active managers have also continued to struggle over a longer timeframe.