Time to invest in the US with stocks at a two decade low?

6th March 2012

Its market may not be storming ahead, but there are positives. The Standard & Poor's 500-stock index finished 5.3 points yesterday, reports the Wall Street Journal, or 0.4%, lower at 1364, with seven of its 10 sectors falling behind. But this was only one day, and February saw strong performance.

A spokesman for Schroders says: "US equities continued their strong performance in February, with the S&P 500 Index producing a dollar return of 3.4%. Small companies delivered even better performance, with the Russell 2000 returning 5%. US stocks were buoyed by broadly encouraging US data (most notably a fall in the unemployment rate) and investors expectations that US stocks could deliver great rates of earnings growth in 2011."

Corporate profits

Also, consider the doubling in corporate profits since 2009 – which means the Standard & Poor's 500 Index is cheaper than at any time during its 34 peaks since 1989, according to new research. Companies in the US index trading at 14.1 times earnings have increased 102% since March 2009, Bloomberg data shows.

The details of the employment data is worth noting. New US claims for unemployment benefits, which dropped 2,000 to 351,000 in the latest figures  – can be viewed as another sign the economy may be on the mend.

The key reason to prefer the US today, however, is the commitment of the Federal Reserve to take action when necessary at a time when Europe looks ever more forlorn. If you believe that high quality, defensive stocks with an exposure to faster-growing emerging markets will be the safest haven in a difficult investing environment then the US remains the best place in the world to go looking for them.

The US is in a strong position, with no major upset on the horizon and the country still contains a large number of attractive opportunities. However, there are analyst fears about the impact of an oil price hike on economic growth in the US. Even so, investors are flocking to the US market, despite this volatility.

A spokesman for Schroders adds: "At a global level, political unrest in the Middle East prompted investors to reallocate money from emerging markets to developed, and US stocks were among the main beneficiaries of this trend.

"However, equity market volatility increased in the second half of the month, reflecting fears that the rising oil price could provide a headwind to the US economic recovery. In terms of sector performance, energy stocks (particularly oil and gas drillers) performed strongly."

Election fever

The US market is likely to benefit from this year's presidential elections. Research by Credit Suisse, the investment bank, shows that in the 21 election years since 1926, only four saw the S&P 500 report negative returns. Pankaj Patel, an analyst at Credit Suisse, said: "If historical patterns persist, this year we can expect equity markets to gain in double digits."

For example, the index fell by about 3% in 1960, when John F Kennedy was elected, by 10% in 2000, when George W Bush was voted into office, and by 38% in 2008, when Lehman Brothers collapsed and Barack Obama won. In the other 12 election years over the period, the S&P his risen, seven times by double-digit percentages.

Mick Gilligan, head of research at Killik & Co, the stockbroker, said America is his preferred market this year. "One of our themes for 2012 is benefiting from an improving US economy. The economic data there has largely beaten expectations and paints a generally improving picture."

In the past, buying US equities at the start of the race for the White House has usually proved a shrewd move. Wall Street tends to do well as incumbent presidents promote optimism among the electorate by boosting the economy.

If you prefer not to rely on historical trends, the current state of the American economy also looks encouraging. So perhaps this market is worth a punt…


More from Mindful Money:

Geithner warns of crisis 'amnesia'

The US economy is rallying, but the housing market remains fragile

US election – What will it do to your portfolio?

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