Obama vs Bush: How the US market has fared – and where to invest now?

4th November 2013

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The US S&P 500 index has soared by more than 100% since US President Barack Obama won his first election five years ago today but what’s the outlook for the remainder of his second term?

Despite being elected right in the midst of the global financial crisis, on 4 November 2008, Obama and his administration have overseen a renaissance of the US economy says Fidelity Worldwide Investment, whose analysis shows that, since his election, the S&P 500 has delivered a respectable cumulative return of 105%.

Markets under Obama’s predecessor, George W. Bush however fared considerably worse. In fact, returns from the S&P 500 under Bush’s administration were the worst of the five most recent presidents. Following the delayed election results on 12 December 2000, the S&P 500 fell -0.78% in the five years that followed.

Conversely Bill Clinton, elected on 3 November 1992, oversaw the largest returns from the US index in the last 30 years. In the five years following Clinton being elected as President of the United States, the S&P 500 returned an impressive 145.02 per cent.

With three years remaining until the next US presidential election, Dominic Rossi, global chief investment officer of equities at Fidelity believes the current macroeconomic and geopolitical conditions are supportive of US equities and equity markets in general and Obama and his eventual successor are therefore likely to continue to witness strong returns from the S&P 500 as the US continues to lead the global recovery.

Rossi says: “The gravitational pull within equity markets seems to be heading west again with the US leading the way. The rest of this decade looks to have more in keeping with the 1990s when Clinton was in power. When Clinton was elected in 1992 he was fortunate enough to reap the fiscal benefits of tax hikes and a peace dividend that arose out of the fall of the Berlin Wall – two tailwinds which helped to restore fiscal surplus.

“This, coupled with robust monetary policy and positive real interest rates, meant the dollar strengthened and commodities weakened. Equities outperformed virtually all other assets and developed markets outperformed emerging markets.”

Under Bush’s administration the US entered into costly military interventions which greatly increased federal spending. This, coupled with a series of tax cuts, meant the fiscal position rapidly deteriorated from 2002. The dollar weakened, commodity prices surged where oil quintupled in price – and this acted as a tax on economy activity notes Rossi.

He adds: “Now, under Obama, we are entering a new period with conditions more reminiscent of the 1990s. After a surge in 2008, federal outlays have been flat since 2009 and sequestration will provide a further boost to fiscal discipline. Meanwhile, the peace dividend has returned as America has cut back its military spending. In addition, since 2009, tax receipts have improved materially and we have seen the deficit shrink to below $1 trillion. By next year the deficit could be back to 3-4% of GDP.

“Additionally, the trade deficit is improving rapidly thanks to falls in net oil imports. The improvements in the ‘twin deficits’ underpins the fundamentals of the US dollar, which will manifest once monetary policy shifts. We expect a stronger US dollar to parallel a re-rating of US equities as they did in the 1990s.”

PRESIDENTIAL PERFORMANCE

Barack Obama: 04/11/2008 to 29/10/2013 – 104.87%

George W. Bush: 12/12/2000 to 12/12/2005 – -0.78%

Bill Clinton: 03/11/1992 to 02/11/1997 – 145.02%

George H. W. Bush: 08/11/1988 to 03/11/1992 – 75.09%

Ronald Reagan: 04/11/1980 to 04/11/1985 – 48.21%

(Source: Datastream, in USD, 29 October 2013. S&P 500 total returns)

What US funds should investors consider?

Rob Morgan, pension and investments analyst at Charles Stanley Direct backs the £561m AXA Framlington American Growth fund, which has holdings in the likes of US technology giants such as Apple, Facebook and Google as well as Amazon. Managed by Stephen Kelly, over the past five years it has achieved a 109% return to its investors.

Morgan also likes the £232m Legg Mason US Smaller Companies fund, a portfolio which Hargreaves Lansdown also rates. Managed by Lauren Romeo, which over the last five years has achieved a return of 123%. Morgan says: “Smaller enterprises in the US should be the natural beneficiaries of an improvement in the domestic economy, and there is a great breadth of companies available to invest in. However, it is worth bearing in mind that “smaller companies” for the definition of this fund can be quite large organisations of up to $2.5bn in size, and the managers often run their winners as they grow to become medium-sized companies of up to $5bn.”

One of The Shares Centre’s top picks is the £410m Henderson US Growth fund, with investments in the likes of Visa and Citigroup it is up by 91% in the past five years. But for investors who wish to take a cheaper, passive approach, one option is the £1bn HSBC American Index fund, which simply tracks the S&P 500 index, over the five years it has delivered 102% to investors – what the index has done over time, less charges.

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