The significant increase in volatility that has taken place in the US equity markets in the last few months has started to open up a number of opportunities. On a valuation basis, US equities are the cheapest they’ve been for fifteen years. This has created an opportunity for new investors to enter the market now to buy quality stocks at a considerable discount.
The markets have already discounted the problems associated with the credit crisis and the slowdown in the US economy, with the significant correction we saw between October 2007 and March 2008.
Relative to bonds, equities are the cheapest they have been since the first quarter of 2003, which was the start of the last bull market. Also, the dollar has fallen considerably and this is helping to make US exports much more competitive and is improving the profits of US multinationals.
We must not forget that in the next two months every American household will receive a tax rebate of between $600 (€388) and $2000, which represents a big fiscal stimulus to the US economy, particularly considering they are targeted at poorer households who are more likely to spend this money.
Positions in US equities with exposure to commodity based sectors such as oil, gas, and basic materials which should benefit from continued buoyant economic activity in emerging markets, and industrials and technology, which should benefit from a weak dollar, could yield longer term results for investors.
We also see further value in large caps on the basis of valuations, greater exposure of large cap to the global economy and the ability to perform relatively better in a high volatility environment.
In addition, the US authorities remain committed to supporting the economy and the Federal Reserve has acted decisively each time a crisis of confidence has occurred – recently cutting interest rates by another 25 basis points. In the short term, this has lowered the chances of further runs on US financial institutions.
The US market will outperform other markets as it is further along the business cycle. Earnings downgrades have already happened in the US whereas they are only just starting in other markets.
Neil Michael, head of quantitative strategies at SPA ETF Plc.
