As the November mid-term congressional elections in the US loom on the horizon, doubts are growing over the early optimism on the country’s recovery.
In the May rebalancing, panellists’ allocation towards North America was increased across the aggressive, balanced and cautious Adviser Fund Index portfolios. For many panellists, the logic was simple – if the global economy is going to recover, it will have to be led by the world’s biggest economy.
The problem was that far from a binary equation, the economic recovery has proven difficult to read as economic indicators have so far fuelled uncertainty rather than dispelled it.
The July payroll figures from the US Bureau of Labor Statistics showed non-farm payroll employment fell by 131,000 over the month, just over double the forecast of 65,000. This only added to concerns after the commerce department announced a sharp downward revision in GDP growth for the second quarter from an annualised rate of 2.4 per cent to 1.6 per cent.
In dollar terms, the S&P 500 has risen by 8.49 per cent over the past 12 months to September 21. The fact that equity markets appear to have been looking through some of the bad news coming out has signalled to some investors that time horizons in markets are being shifted outwards. To others, however, it suggests a worrying naivety.
Whitechurch Securities head of research Ben Willis says: “We are neutral on the US. I think the problem is that there is still a great deal of concern over the US consumer and in the past they have been key to the country pulling itself out of trouble. The Government is also yet to bring in any austerity measures.”
While the outlook for the US remains opaque, it would be a surprise to see AFI panellists jumping further into the market during the rebalancing in November. This is particularly because the outcome of the congressional elections could see President Barack Obama’s Democrat party lose control of the lower house to the resurgent Republicans.
Many commentators have suggested that this outcome could be disastrous to the country’s attempts to drag itself out of the worst economic downturn for a generation but not everyone shares this pessimism.
Hargreaves Lansdown investment manager Ben Yearsley says: “If the Republicans make large gains in November, it could help to reduce investor concerns over policy risk because no new policy could be passed.”
Of course, there are nuggets of good news within all the apocalyptic pronouncements. Last week, the US commerce department released figures showing privately owned housing starts rose by 10.5 per cent in August, the biggest monthly increase since April. A recovery in the housing market is generally perceived as key to increasing consumer spending and dragging people out of negative equity.
Furthermore, behind the headline economic figures, there are also some major companies which have delivered strong returns in the past year. Yearsley says market sensitivity to macro news is providing opportunities for active managers to outperform.