tide has turned against the outlook for US growth. A flurry of weaker than expected data – culminating with economic growth data released last week, showing the pace of expansion had slowed from 3.7 per cent in the first quarter of the year to 2.4 per cent in the second – saw investors concerns shift from Europe and its sovereign debt crisis, to fears about US growth grinding to a halt.
But while financial markets are quick to react to any economic weakness, are they making the situation more dramatic than it actually is? Yes, says Philip Isherwood, equity strategist at Evolution Securities. “Some see the loss of macro momentum that has set in as something sinister, and a portent of much worse to come. But according to previous post-recessionary periods, the truth is that this is inevitable… The loss of altitude is a fairly normal post-recessionary experience, and the fact that a rate of change cannot be sustained doesn’t mean it has to go negative.”
GROWTH IS MODERATING
Isherwood argues that at current levels the US’s main manufacturing index the ISM, which traditionally has a strong relationship with equities, is still pointing to further growth, albeit at a more moderate pace. The ISM reading for July was 55.5, down from 56.2 in July. However, it remains above the crucial 50 level, which indicates that manufacturing activity is still expanding. Only if this index falls below 50, should investors be worried, says Isherwood, as that would hurt European and US equity markets.
Virginie Maisonneuve, head of multi-regional equities at Schroders, says that in amongst the disappointing data releases there have been some bright spots for the US economy, most notably in corporate spending, which has ticked up by a whopping 22 per cent. “There has been a big upswing in spending on software in the US, and there are investment opportunities in the US software sector,” says Maisonneuve. She is also attracted to industrials and large US companies that have exposure to fast growing emerging markets.
Regarding the domestic economy, Maisonneuve says that the outlook for consumption will remain weak as long as unemployment stays close to 10 per cent. However, the performance of US retailers has turned into a two-tier affair: “We are looking at companies with a strong competitive advantage. Some discount retailers have done extremely well during the recession compared to mid-range outlets.”
INVESTORS SHOULD HAVE FAITH
Reports last weekend suggested that the US economy could fall behind its counter-parts in Europe and the UK. But should investors be worried that the US economy will be the laggard in the developed world? The shift in emphasis from Europe’s woes to those faced by the US coincided with the release of stress tests on European banks and some impressive economic data from Germany. “I think this is a period of recalibration,” says Brad Sorensen, director of market and sector research at Charles Schwab. “Europe has temporarily worked through its problems – it passed its stress tests. But the economic growth out of the US is still good. The recent weakness is just US growth retreating to a more sustainable level.”
Investors who are worried about the prospects for the world’s largest economy can rest easy. Although growth figures have moderated, they remain solid. This should fuel growth for the rest of the year, which is good news for equity markets. Investors with long time horizons shouldn’t ditch the US equity market yet.