US equities have been on fire lately, delivering stellar returns for investors since the bull market kicked off in October 2023. And let’s not forget the incredible run stretching all the way back to the depths of the Global Financial Crisis (GFC) in 2009. Thanks to a mix of faster economic growth, strong corporate earnings and rising valuations, the US market has been riding a seemingly unstoppable wave of momentum.
With the feel-good factor and wealth this creates, it’s easy to believe the party could last forever. But here’s the catch: recent data has reminded us that no market climbs in a straight line forever. That’s where the benefits of diversification steps in.
US equity ownership, and therefore sensitivity, is near a record high
US retail investors have historically been big fans of equities, more so than other developed countries. This generally reflects their broader appetite for risk and hunger for financial returns.
On average, since the early 1950s, household equity exposure has hovered around 24%. During the lows of the GFC it dipped close to 20%. But since then, it’s been a steady climb - with a few bumps along the way - to an impressive 42% today. This surge has been a major boost for consumer confidence and spending as markets thrive.
The flip side is that if market momentum stalls, confidence will likely take a hit. The virtuous circle driving growth could suddenly revert to a vicious one.
Source: Richard Bernstein Advisors as at October 2024
Equity beta is looking stretched
Growth style investing has been all the rage over recent years, and it’s pushed retail investors equity beta exposure into overdrive. Bank of America’s private client equity beta calculation has jumped from 0.75 (i.e. less risky than the market) in 2009 to over 1.4 today.
This suggests investors are “all in”, riding the wave and throwing caution to the wind. Again, this is great, so long as the S&P 500 keeps climbing, but any stumble in the market could quickly turn this high-stake game into a reality check.
Source: BofA Global Investment Strategy as at October 2024
Strong balance sheets, cashflow and earnings - what's not to love?
US company fundamentals like cashflow and profits are looking solid, and that’s been helping fuel retail investor excitement and offering comfort they’re not taking on unwarranted risk. However, with so many investors fully exposed to the US market - and expectations riding high - there not a lot of room for error.
Since Trump’s election win, markets have embraced the prospect of pro-growth tax cuts, deregulation, and supportive domestic policies. This is creating the potential for a broader and more balanced market opening up exciting new opportunities for investors, especially in mid and small caps. This could bring a fresh layer of diversification to portfolios and boost market resilience.
What gets measured, gets managed
In his first presidential term, Trump often referred to the equity market as a key measure of his success. With markets already near record highs, lofty valuations and buoyant investor expectations, there is a lot of blue sky being factored in. Trump is all too aware that many of the electorate are equity investors, and so where the markets go will also play a part in where his future popularity trends – so watch this space.
Whilst we’re not calling for an end to US equity market leadership - which would be both brave (and probably foolish) - we are firmly advocating diversification. Not only within the US, where there are cheaper investment opportunities with equally compelling earnings forecasts, but also internationally.
Geographical regions and asset classes that investors appear to love to hate, like emerging markets and the UK, are catching our attention. These under owned, unloved, and undervalued markets ought to hold up relatively well if US momentum falters – precisely why we like diversification – offering protection from the unexpected.
Source: RLAM as at November 2024
This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity. Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.
