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US stock markets’ hat-trick

Jonathan Wright

Jonathan Wright - Fidelity Personal Investing

As the triumphant US women’s soccer team paraded down New York’s Broadway yesterday, a few blocks away on Wall St, stock markets were scoring their own hat-trick.

US stock markets’ hat-trick

The three main US indices - the Dow Jones, S&P 500 and Nasdaq all hit record intra-day highs in yesterday’s trading.

This was due to Fed Chairman Jerome Powell’s latest comments, hinting that interest rates in the States are likely to be cut when the Fed meets at the end of July. Speaking to Congress, Mr Powell said “many” Fed officials now believe a weakening global economy and rising trade tensions have strengthened the case for a rate cut.

Despite a strong jobs report for the month of June and a new truce in the trade war between the US and China, the Fed Chairman is concerned about a slowdown. For now markets have opted to look on the bright side and focused on expectations that interest rates could be cut by at least 25 basis points from its current level of 2.25-2.5%.

A rate cut would weaken the US dollar, making US exports cheaper to overseas buyers, as well as boost US households, as borrowing becomes more affordable. For an economy so dependent on its consumer, it’s easy to see why markets have welcomed this news as a rate cut would make US households feel a little bit richer.

Eyeing a re-election next year, President Trump is also very aware of this and has been putting pressure on the Fed to cut rates to boost the US economy.

This is a far cry from the start of the year when markets were expecting the Fed to do the opposite and raise rates. Since then, as the Fed has become increasingly more dovish, US markets have risen steadily.

The key question for investors is whether or not this can continue or are we now in the final throes of the bull market, where often the best gains occur before it inevitably runs out of steam.

This was a question that came up in yesterday’s Investment Outlook webcast with Tom Stevenson. The latest July edition of the Investment Outlook report has been published and Tom remains cautious on the US with a neutral stance that has not changed since the last report in April.

In the webcast he stressed the difficulty in spotting the end of a bull market, citing the Former Fed Chairman Alan Greenspan’s warnings of “irrational exuberance” made in 1995, yet the market continued to rise for another five years till the boom finally came to an end.

In his view, for the US markets to rise further, earnings growth will need to continue which is questionable and the Fed will need to follow through with rate cuts.

Of course, these are unknowns for now and the case for holding a diversified range of assets such as shares and bonds from different regions around the world is as important as it’s ever been.

For those positive on the US, our Select 50 list has five funds recommended for the region, such as the JPM US Select Fund whose top five holdings includes Microsoft, Amazon, Google-owner Alphabet, Coca-Cola and Pfizer.

Or alternatively, a global fund such as the Rathbone Global Opportunities Fund is another way of accessing the US as the fund is currently overweight US. The only non-US company in its top ten holdings is Chinese internet company Tencent.

For those looking for a more balanced approach, the Fidelity Select 50 Balanced Fund, does exactly that by investing in a range of different shares and bonds from various markets around the world to provide that balance.

More on Select 50

More on the Investment Outlook

Important information

The value of investments and the income from them can go down as well as up, so you may get back less than you invest. 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. Select 50 is not a personal recommendation to buy or sell a fund. 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. 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 an authorised financial adviser.