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.

BY most accounts, the US economy is running hot. The pent-up demand of US consumers in the wake of the pandemic is now showing itself with a vengeance, with retail sales probably up by more than 8% in America’s November-December holiday season compared with 2020 according to Mastercard1.

The Conference Board – America’s leading business membership and research group –now anticipates the US economy to have grown by 6.0% in the final three months of last year compared with the same period in 20202.

That’s not at all bad, bearing in mind December was blighted by the rapid spread of the Omicron variant of Covid-19. A rough estimate is that domestic consumer spending accounts for about two thirds of US economic activity.

Whichever way you look at it, Joe Biden’s first year in office has been a boom time. US stocks have made new record highs during the past month, hot on the heels of successions of new peaks in the second half of 20213.

Gains have been broad based too. The technology specialists of the Nasdaq Index have seen their shares soar over the past year, transcending expectations in some quarters that the ending of lockdown conditions might drive retrenchment among the tech stars of 2020.

Apple was never far from the front of the leading pack in 2021, progressing to become the world’s first three trillion dollar company4. Tesla broke new ground by delivering almost one million premium electric vehicles during the year while seeing the value of its stock rise to US$1 trillion5.

Even the dull old Dow Jones Industrials – with its clutch of comparatively staid constituents – joined the party. This recovery, it seems, has had something to offer a very wide range of American companies.

If the party is to end, it may be a difficult corporate earnings season that helps to do it. It’s unlikely to be the current one though. Analysts expect a positive final quarter of 2021 will have capped a year of spectacular profits growth of around 45%6.

However, earnings will be unable to maintain such ferocious growth this year, mostly because year-on-year comparisons will start from a much more demanding base. Current estimates suggest we shall see earnings growing by about 9% this year7.

That’s still respectable. But a rate akin to this may prove less of a buffer for sentiment should the economic backdrop deteriorate in other respects – either through demand failures or supply constraints, or a sharper-than-expected rise in interest rates.

The most conspicuous problem arising out of the Biden boom is, of course, inflation. It’s easy to forget that, as recently as a year ago, one of the main preoccupations of markets was why US inflation had been unable to consistently sustain the Federal Reserve Bank’s 2.0% target rate, despite years of economic stimulus.

Today, that problem has been turned on its head, with leaps in prices over recent months adding up to a headline inflation rate of 7.0% – a 40-year high – in December 20218.

The pressures have been building from all angles. Prices have increased owing to a concoction of rising raw material costs, labour shortages, supply chain disruptions and the release of pent-up consumer and business demand.

Yet, still no rise in interest rates. No doubt recalling the rate rises that conspired, along with a number of other factors, to bring about a recession in 1980, the present incumbents at the Federal Reserve seem to fear over-tightening the most.

The path to higher rates appears to have been well prepared though, in that markets have generally refused to take fright at talk of a first rate rise.

Having said that, highly rated Nasdaq stocks have retreated since the start of this year, after the Fed released meeting minutes showing policymakers wanted to speed up the pace of rate rises. Hawkish comments from several regional Fed governors on Thursday kept the pressure on.

Higher interest rates are, on average, worse for high growth companies such as those found on the Nasdaq. One reason for this is purely mathematical. By definition, a company that grows its earnings consistently quickly each year has the largest part of its future cash flows arriving farther down the track. These stand to be worth less to an investor when interest rates are rising in the intervening years.

Second, companies able to grow their earnings whatever the economic weather are more valuable to investors when the economy overall is growing very slowly or contracting. Rising interest rates normally come about when economic growth is strong – as it is today – and, at these times, companies whose fortunes are more closely interlinked to the economy tend to have more to gain.

In testimony to the Senate this week, Fed Governor Jay Powell accentuated the positive side of the current economic environment, saying that the economy is on a strong footing and that he hopes there will be a return to more normal supply conditions this year9.

This second point is most important, as it suggests the Fed has not ruled out the possibility that excess inflation arising from supply chain disruptions will abate over the months ahead.

Undoubtedly, there are superior value-oriented investment opportunities in other markets – notably in Japan and the UK. However, investors may have overlooked the US as an investment destination many times in the past based on value measures alone and missed out as a result.

The continued success or otherwise of the US market in 2022 may depend on how comprehensively the corporate earnings recovery continues and how expectations change about where interest rates will ultimately end up. Markets currently expect three or four quarter point rises in 2022.  

The signs are generally positive. Earnings appear to remain on an upwards track and the Fed has been at pains to underline its intention to foster a continued economic expansion, presumably through raising interest rates at a measured pace and to an endpoint that is modest by historical standards. In an environment where the expected returns from cash and bonds remain paltry, the growth that US companies can deliver should remain a valuable asset.

Investors can gain diversified exposures to baskets of US shares via several Fidelity Select 50 funds.

The Fidelity Global Special Situations Fund clearly finds a lot to be positive about stateside, with a 57% exposure to US companies as at the end of last month. Large fund positions currently include:  Microsoft, Apple, Alphabet (Google) and UnitedHealth Group. This fund is one of Tom Stevenson’s four Fund Picks for 2022.

The JPM US Select Fund has large positions in Microsoft, Apple and Alphabet too. Amazon, Mastercard and Tesla are other top-10 holdings. So another option to gain a significant exposure to America’s high growth stars.

The Brown Advisory US Sustainable Growth Fund has a moderately different skew, tapping into companies set to benefit from the US government’s infrastructure upgrade ambitions while maintaining an environmentally sound strategy. Current large holdings include Microsoft, the communications infrastructure company American Tower, and the science and technology innovator Danaher.

You can find out more about what Fidelity thinks about the prospects for the US and all other major markets and asset classes in 2022 in the latest Investment Outlook, published earlier this week.

Here’s Tom Stevenson’s outlook for the US in the first quarter of this year.

Source:

1 Mastercard, 26.12.21
2 Conference Board, 12.01.22
3 FT, 23.12.21
4 Reuters, 03.01.22
5 Tesla Inc., 02.01.22
6 FactSet, 07.01.22
7 FactSet, 07.01.22
8 US Bureau of Labor Statistics, 12.01.22
9 New York Times, 11.01.22

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. 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.

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