As we recently highlighted in our Global Market Outlook Navigating a Bumpy Landing, we expect market uncertainty and volatility to persist for some time, leading to an uncertain journey ahead with a wide range of possible outcomes. In US equities, our outlook continues to favour a relatively defensive approach, using Dividend Aristocrats or domestic core equity exposures.
From a macro perspective, we believe the “most anticipated recession” remains the base case for the US market. We are seeing rapid disinflation coincide with recession fears, albeit with upside risks and therefore slower relief from central banks. Energy prices remain the biggest risk to outlook both from China reopening as well as supply disruptions. US equity investors should prepare themselves for an ebbing in the US dollar strength trade. Here we take a broad view of the US equities opportunities, so that investors can consider what to do next with their portfolio orientation.
We continue to recommend investors look at stable dividend stocks, with a value-bias, to stay long equities during these times of macro-economic recession concerns. Dividend Aristocrats is uniquely positioned to help investors play the tighter monetary policy theme (i.e., value > growth stocks), while aiming to protect the portfolio against short term volatility. Pricing of dividend stocks should remain opportunistic, as we see investors continue with inflows despite overweight positioning. This theme is most interesting for the factor conscience investor concerned with the growth/value exposure of their portfolio.
With GDP softening, investors may turn towards US Large Caps which offer exposure to high quality companies, offering strong balance sheets and robust earnings, which are necessities against economic headwinds. Price-to-Earnings of the S&P 500 does not seem overstretched given inflation is slowing down. Investors with a significant benchmark to US equities, who fear a global recession might find this provides a solution.
Investors who demand higher earnings yield premium over local bonds may prefer to invest in S&P MidCap 400® Index. Mid Cap Equities offer access to more domestic businesses which are supported by remarkably strong US consumer activity as unemployment remains low. This could be most interesting for investors seeking to barbell some equity risk premia with a resilient US domestic market.
Small caps, relative to larger companies, tend to be more cyclical and more domestic. Constituents of the Russell 2000 Index and MSCI US Small Cap Value Weighted Index generate around 80% of revenue within the US, while for S&P 500 Index the corresponding number is 60%. This means small cap stocks face less headwind from the relatively strong US dollar and more support from the remarkably resilient domestic market. This fund could be interesting for investors who believe that the US consumer will lead the next market growth cycle.