Industry Voice: The US has, in recent months, exhibited an extended period of outperformance relative to the rest of the world in both GDP growth and stock market performance, led by the standout performer, the FAANG-driven technology sector.
When commentators refer to ‘US markets', the tech-heavy S&P 500 is the most commonly used proxy. Thus far in 2018, the S&P 500 has strongly outperformed the rest of the world, and remains close to neutral for the year despite a recent selloff. However, the more broad-based NYSE Composite Index is much further into negative territory following the recent selloff, indicating that outside the 500 largest US firms by market-capitalisation the picture is not so positive. Interest rate sensitive sectors like homebuilders and automobiles have also been hit hard, and are firmly into the red so far in 2018, which is hardly surprising given real rates are at their highest level since 2010, and mortgage rates are at 5-year highs.
What is important here is that there are real headwinds for these interest rate sensitive sectors, and this is not simply sentiment driven weakness. These sectors have benefitted from artificially low rates created by loose monetary policy - which is continuing to be unwound - despite President Trump's claims that the "out of control" Federal Reserve was to blame for the recent selloff. We continue to closely watch those sectors that tend to be the most sensitive to Fed policy.
Looking beyond equity markets
When we look at economic indicators, we see other issues at play. Retail sales growth is still strong, but is starting to slow meaningfully, with Q3 annualised figures falling to 5.1% from 7.3% in Q2. A 30% decline over a single quarter is not something to ignore. While the short-term picture has been helped by home appliances and vehicle sales, inventories have jumped meaningfully, and may be the result of demand driven by fears of prices spiking when the trade tariffs with China begin to hit.
The canary in the coal mine
But most importantly, what do these indicators mean for positioning in the Fidelity Multi Asset Open range of portfolios? Despite the rather negative assessment for the direction of the US presented here, we still like the defensiveness built into the US stock market compared to other markets. But to maintain exposure while being defensive, we have been underweighting the FAANG stocks, with our four US equity managers having a bias towards more defensive value stocks. In some of our funds we have also decided to short semiconductors, which are a key component in technology devices and often a "canary in the coal mine" for the direction of technology stocks, in order to further reduce our technology exposure. Another key decision taken over the summer months was to reduce our exposure to the innately cyclical energy sector in order to buy into utilities, which are less tied to economic growth and tend to be stronger performers in times of uncertainty.
With the cracks in the strong performance of the US beginning to show, we are positioned defensively against the very real vulnerabilities in the global economy. The US has been the standout so far in 2018, but when we look under the hood we see the US is not immune from tighter financial conditions, and may just be beginning to show that its resilience is not a certainty.
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