The world’s largest economy appears to have turned a corner as a wave of positive data from the US indicating an improved recovery.
The widely observed non-farm payroll update, which includes goods-producing, construction and manufacturing companies in the US, this month showed the US economy created some 165,000 jobs in April, ahead of forecasts, while employment figures for February and March were also revised upwards. Overall unemployment dropped to 7.5 per cent, the lowest level since the end of 2008.
The positive economic data has helped drive markets up. In early May, the Dow Jones broke through the 15,000 mark for the first time, following the S&P 500 index which also hit a new high after pushing past 1,600.
The optimism was bolstered by the world’s most famous investor. Earlier this month, Berkshire Hathaway boss Warren Buffett told CNBC: “You will see (stock) numbers a lot higher than this in your lifetime.”
The good news has not just emerged in the form of job numbers and market rises. The battered US housing market is enjoying some positive news. The S&P/Case-Shiller Home Price Indices, the leading measure of U.S. residential prices, shows average home prices increased by 9 per cent in the 12 months to February.
But the one negative included in the report, according to BlackRock’s chief investment strategist Russ Koesterich, is tepid wage growth. He says: “So many Americans are still unemployed or underemployed, wages are rising at a painfully slow rate, up just 1.9 per cent in April, a pace that is barely keeping up with inflation.”
Schroders chief economist and strategist Keith Wade points out the employment figures highlight the underlying strength of the economy, but he adds: “We still believe that growth will cool from the pace of the first quarter as the inventory cycle turns, consumers react to higher taxes and the full effects of the sequester come through.”
The market rally is also about savers realising they need to look to equities to generate a return, given the prolongued period of very low interest rates, according to ClearBridge Investments co-chief investment officer Hersh Cohen. He adds: “Clearly there are pieces of evidence that the economy is slowly improving. But there are plenty of headwinds, for example consumers are still burdened with debt.”
Chelsea Financial Services managing director Darius McDermott says: “We have been saying for circa the past two years that UK investors have been under-invested in the US. Where some investors typically have 4 per cent invested, we believe 15 to 20 per cent of the equity portion of a portfolio is more appropriate.”
A major factor in the current US story is the increased production of shale gas, dubbed the “shale gale”, where America has an abundance of cheap natural gas providing cheap energy costs. As a result some major manufacturers, including Caterpillar and Ford, are bringing at least some of their production lines back to the US.
Charles Stanley Direct head of investment research Ben Yearsley says: “I have been positive on the US for the past four or five months. There are two factors behind this. Firstly, the US dollar will continue to be a strong currency, as it is the world reserve currency and from a UK investor’s perspective, they may make currency as well as market gains. The second is the shale gas revolution. It makes sense to manufacture more domestically now. It is estimated by 2020, the US will be a net exporter of energy.”
Koesterich notes that while stocks are continuing to advance, the composition of the rally has started to change, noting large and mega-cap stocks are now outperforming smaller-caps, a trend he expects to continue. He says: “Some of the more expensive defensive sectors of the market, such as utilities are underperforming, while the technology sector has experienced better results and still looks inexpensive.”
Cohen agrees stocks are not as cheap as they were but believes they are currently “reasonably valued”. He adds: “This is the golden age of the dividend. Investors need to look at the dividend payouts, which have been spectacular in many cases in the US. Walmart and UPS, the international delivery firm, have upped their dividend payouts by 18 and 8 per cent respectively this year.”