What could derail US equities in 2022?, December 2021

In recent times, the US has been the stock market to back: it has had better performance than the rest of the world in eight out of the past ten years*.

The positive returns have continued in 2021 and, according to Invesco, during Biden’s first year as US President, the S&P 500 has risen more than for any other President since data has been available, returning 38.3%.


S&P500 first year post-Presidential election price performance (%)


Past performance is a not a guide to future returns. Source: Invesco, Datastream and Bloomberg at 13 November 2021.

“There are a number of overriding factors that have underpinned the market rally, commented Michael Joynson, head of market insights at Invesco. “First there was the announcement by Pfizer six days after the election of their successful Covid vaccine Phase 3 trial which showed that a vaccine could beat the virus – and the subsequent rollout of that and other vaccines accelerating the re-opening of the economy.

“There has also been the Federal Reserve’s very aggressive monetary policy stance that has provided enormous amounts of liquidity to the financial system, which alongside the substantial fiscal stimulus, has ensured a very strong economic recovery, after the worst downturn since the Great Depression, which in turn has driven a very strong rally in corporate earnings.

“And it is these earnings that have driven the market higher. So, it’s fairly clear that the S&P’s robust performance in Biden’s first year has largely been down to a confluence of factors that actually have little to do with the new President. It’s been the economic cycle and the monetary policy stance that have been the main drivers.”

But will this good fortune continue in 2022? Or will rising inflation or decreasing consumer spending put a spanner in the works?

Inflation continues to rise

US inflation hit 6.2% in October, the highest rate since November 1990 - the month “Home Alone” was released in cinemas. And there are suggestions that a peak at or above 7% in the months ahead is possible.

And of course, with rising inflation comes the possibility of rising interest rates. As Ian Lance, fund manager at RWC pointed out: “The central banks are walking a tightrope. Given the huge amount of leverage in the system, they know that even a small rise in interest rates runs the danger of tipping the global economy back into recession.”

The impact of rising rates on equities has historically depended on both the speed of change and the level, according to Goldman Sachs Asset Management. If the changes are abrupt and extreme in either direction, the average one-month S&P 500 returns have historically been disappointing.

“Nothing hurts equities more than unexpected tightening. But the Fed and markets seem to be on the same page, and we are unlikely to see any negative surprises,” commented Jeremy Podger, manager of Fidelity Global Special Situations.

Consumer spending slows

According to Emirl Van Den Heiligenberg, head of asset allocation at Legal & General Investment Management, US consumer sentiment has also fallen. “The University of Michigan survey of consumer sentiment has tumbled to levels rarely seen outside recessions,” he said.

“Perhaps the most obvious inflation-fighting tools in the administration’s arsenal are releasing oil from the Strategic Petroleum Reserve and cutting tariffs on Chinese imports. This obviously wouldn’t be a long-term fix to cool oil prices, but it would represent a short-term supply boost of up to 4.5 million barrels per day.

“It would have seemed unthinkable a few months ago that Biden would consider rolling back tariffs given the political danger of being outflanked by the Republicans on this issue. However, maybe that calculus is changing with the growing inflation concerns. Tariff reduction would offer marginal relief on the outlook for both US inflation and Chinese growth. It would be very warmly welcomed by financial markets as a result.”

Tariffs on steel and aluminium between the EU and the US have already been eased, according to the managers of Guinness Global Equity Income fund, which is on the Chelsea Core Selection.

“US economic growth disappointed analyst expectations, with Gross Domestic Product growth at just 2.0% in the third quarter, below analyst expectations of 3.2%,” they added. “This is a sharp drop from Q2, where US government stimulus payments helped to underpin higher spending, leading to GDP growth of 6.7%. The deceleration was driven in part by a slowdown in consumer activity exacerbated by supply chain bottlenecks.”

Bob Kaynor, manager of Schroder US Mid Cap, also believes spending will come from elsewhere other than the consumer this year. “While the savings rate remains strong, the US consumer has spent their way down to a more normal level of savings from the post-pandemic historical peak,” he said. “But companies will be spending more due to the low cost of capital coupled with the fact that increased visibility around future growth prospects has boosted confidence in boardrooms.

“In addition, companies are now more circumspect about their global supply chains, which means more focus and investment in the US and in nearby countries such as Mexico. In this environment, US small and mid-cap companies are set to benefit more than large cap companies.”

James Thomson, manager of Rathbone Global Opportunities, is also still positive about the outlook for the US. “Our key exposure is to the US - about two thirds of the fund - because that's where the growth is,” he said. “US companies are growing profits more than four times faster than the rest of the developed world and I think many of those advantages are permanent.”

Investors considering investing in US equities may like to look at the seven funds on the Chelsea Selection:

  • Artemis US Extended Alpha
  • AXA Framlington American Growth
  • Baillie Gifford American
  • Brown Advisory US Flexible Equity
  • Fidelity Index US
  • FTF Martin Currie US Unconstrained
  • Premier Miton US Opportunities

*Source: FE fundinfo, total returns in sterling, calendar years 2011-2020, S&P 500 vs MSCI World Index

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and managers and do not constitute financial advice.

Published on 06/12/2021