Should investors put America first?

America’s Thanksgiving this week will be a time for celebrating the positives of the past year, but also, perhaps, a time to ponder the great change that lies ahead. The aftermath of the US election has certainly given markets plenty to think about, both in terms of the future economic landscape and America’s place in the world.

The “Trump Bump” seen across stock markets has, so far, been almost entirely confined to US shores. Foreign markets are, quite rightly, in the process of assessing potential trade tariffs, which could risk downturns in their home economies. For its part, America has momentum on its side, something most overseas markets currently lack.

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The president-elect’s America First mantra sends a clear message that growth at home is a priority. Tariffs and deregulation could be set to benefit US banking and commerce, while tax cuts would provide a boost for consumers and businesses alike.

The election has also helped to underline the pre-eminence of US companies, particularly in new technologies. Elon Musk’s new role at the heart of government suggests the new economy will be a strong focus for the new administration. Reports of moves towards building a federal framework for self-driving vehicles is a prime early example¹.

The big question is will the market optimism soon fade, just as it did in the UK for Keir Starmer’s newly formed government? Labour’s big growth agenda seems to have been sidelined of late, amid worries about increased borrowing, tax rises and short term growth constraints.

It might, but what will be important will be the President-elect’s distinctive approach over the next four years. His solution to the growth challenge appears to hinge on tax cuts as well as a drive to cut red tape and deliver small government.

The US economy certainly looks well primed and ready, having expanded at a 2.8% annual rate in the third quarter after recording 3% growth the quarter before². The economy has shown itself to be resilient in the face of shocks, supported by a sharp fall in inflation and a generally healthy labour market.

Having avoided the recession that some feared during the first half of the year, forecasts have been pointing to US growth of around 2.5% or maybe more for the full year, and that’s from before the election result was known. Official forecasts suggest the economy may grow at a slower pace of around 1.7% next year but this doesn’t take account of the latest seismic shift on the political scene³.

As ever, there are risks. US stock market investors have been required to contend with high valuations for much of the past year, and that hasn’t changed since the election. European markets look positively cheap by comparison, raising questions as to whether the balance has already shifted too far westwards.

Recent trading sessions in New York suggest the Trump Bump could quite easily fade. Current market fears revolve around the reduced likelihood of interest rate cuts. While a further rate cut in December remains a possibility, the latest polls of interest rate traders suggest a reduction is no longer a foregone conclusion⁴.

There’s also the risk that the market begins to take the view nothing comes without a price. Some studies have concluded that tariffs had a net negative effect on economic output and employment last time out⁵. Moreover, future tariffs will likely impact US consumer companies through higher input costs. Renewable energy businesses too may now face a less friendly regime. For them, “drill baby, drill” will be anathema.

The bond markets present another challenge. The cost of borrowing –as measured by 10 year Treasury yields – has risen to around 4.4% from around 3.7% in mid-to-late September⁶.

That cost could rise further still if more serious concerns about the fiscal sustainability of the government’s plans take hold. Higher bond yields mean not only tighter credit conditions but also accentuate high share valuations.

Another factor worth bearing in mind is the strength of the dollar. Despite a 0.75% reduction in interest rate cuts since September, the dollar has soared over the past month. While this will help to keep import prices compressed, it will hurt exports and the earnings of American multinationals.

Despite these challenges, it’s hard to ignore the underlying strength of America’s corporate sector, or that the country has skirted a recession without the assistance of a sustained period of lower interest rates. Company earnings are currently expected to grow by around 9% this year and 15% next⁷. These factors support the case for a continuation of the current bull market. At just two years old, it remains relatively young.

In the face of uncertainty, staying diversified still constitutes a sensible investment approach. Fidelity’s Select 50 list of favourite funds contains a number of ideas for investors that capture a diversified US exposure but each with a strong style bias.

The Brown Advisory US Sustainable Growth Fund is one example. Fidelity’s experts favour this fund for its experienced management and the strong pool of company analysts its draws on. The fund is mostly invested in larger companies with a durable competitive advantage and steady rather than necessarily rapid growth. It also has a focus on quality.

This is a reasonably concentrated growth portfolio of between 30 and 40 holdings in companies worth $2 billion or more. It is, however, by no means a carbon copy of the market, with just four of America’s “Magnificent Seven” tech companies in its top-10.

If you prefer an approach centred on shares that rank highly in terms of value, the Dodge & Cox Worldwide US Stock Fund may be more to your liking. This is another relatively concentrated fund, but here the manager tends to adopt a contrarian approach, often buying companies with depressed share prices. As such, it would likely blend well with the Brown Advisory US Sustainable Growth Fund described above.

The fund’s value bias is reflected in a low forward earnings multiple of 14.7x and trailing dividend yield of 1.8% as at the end of September. The same metrics for the S&P 500 Index were 22.5x and 1.3% at the same date⁸.

Finally, smaller US companies may well be swept higher by the Trump tide as they tend earn a greater proportion of their profits from the domestic economy. The Brown Advisory US Smaller Companies Fund, also on the Select 50, targets a concentrated portfolio of smaller companies with above-average growth, sound management and competitive advantages. Brown Advisory is based in the US and has an extensive team researching and investing in smaller companies, important factors when it comes to this asset class.

Source:

¹ Bloomberg, 17.11.24
² US Bureau of Economic Analysis, 30.10.24
³ The Conference Board, 23.10.24
⁴ CME FedWatch, 21.11.24
⁵ Tax Foundation, 26.06.24
⁶ Federal Reserve Bank of St Louis, 19.11.24
⁷ FactSet, 15.11.24
⁸ Dodge & Cox, 30.09.24 

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Select 50 is not a personal recommendation to buy or sell a fund. The Brown Advisory US Smaller Companies Fund invests more heavily than others in smaller companies, which can carry a higher risk because their share prices may be more volatile than those of larger companies. The Dodge & Cox Worldwide US Stock Fund invests in a relatively small number of companies and so may carry more risk than funds that are more diversified. It can also use financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.