US economy hits longest phase of expansion in history: should investors be prepared for a downturn?

• US economy grows for 121 month from June 2009
• Longest period of economic growth for US on record, surpassing the 120-months of growth between March 1991 and March 2001
• S&P 500 has delivered an annualized average of 16.87% for sterling investors

The US economy has today set a new record for the longest period of expansion ever witnessed after growing for 121 months since the aftermath of the global financial crisis.

Spanning a period predominantly under President Barack Obama, and now under President Trump, the US has continuously expanded since June 2009, surpassing the Bush/Clinton era between 1991 and 2001.

Amid this record long growth phase, US markets have reached new all-time highs, with the S&P 500 surpassing 3,000 points last month for the first time ever.

The question now is whether investors should prepare for a downturn. A dovish move from the Federal Reserve overnight – which cut interest rates for the first time in over a decade – could provide further impetus for markets from here, but there are growing concerns that a recession is just around the corner.

Adrian Lowcock, Head of Personal Investing, Willis Owen says:

“Corporate earnings have slowed but have not been as bad as feared, GDP was better than expected, and while US valuations remain elevated the Fed is now taking action. Coupled with low inflation expectations it means that an imminent recession does not look likely.

“Nonetheless, the key now is whether or not the US Fed is going to follow expectations of the market and make further cuts. The Fed said last night that they are open to further moves lower in rates, but a lack of clarity on this spooked markets.

“However, the Fed are cognizant of the market’s broader concerns, so for investors it is now about balancing elevated valuations against the political backdrop. Trump will not want a market sell-off as he bids to get re-elected, and he will likely stick to previous form and be very vocal about what he expects in terms of support from the Fed.

“Whether he gets what he wants is the big question, and having seen markets climb almost 20% year-to-date, some caution from investors seems a sensible approach.”

Bull points:

• Growth has exceeded other developed markets, with 3.1% annualised in quarter one
• Economy looks set to remain the best performer in developed markets
• Although overall market is not cheap, strip out technology and it looks reasonable
• The bias to high growth sectors warrants a premium to other developed markets
• Fed is on the ball and has showed its willingness to act to sustain high growth
• US–Chinese trade negotiations are making progress
• Trump will want to keep the economy at full steam as he campaigns for re-election in November 2020

Bear points:

• Market is at record highs and economy late cycle; good news may be largely reflected in share prices
• Consumer and business confidence indices have weakened, and survey data indicates business activity is slowing
• GDP growth is expected to slow down to 2.6% this year
• Corporate earnings will not achieve the same level of growth as in 2018 due to one off boosts fading
• US-Chinese trade war not yet resolved so could spark up again
• Tariff threats may exceed to other regions (ultimately no winners)
• Competition enquiry into digital sector and regulatory oversight possible

Fund picks:

• Artemis US Select – Cormac Weldon looks for economically-sensitive companies, particularly focusing on businesses that perform best during ‘growth’ phases of the economy. Meticulous company screening is combined with wider social, economic and thematic research to produce a high conviction of 40 to 60 best ideas. Despite this concentration, performance has been solid with lower volatility than many of its peers. The team models the impact various scenarios might have on a company’s share price. A key element of their approach is the belief that risk is only worth taking if the potential reward significantly exceeds the potential loss.
• Merian North American Equity – At the helm of this strategy is a three-man management team: Mike Servant, Amadeo Alentorn, and Ian Heslop, who heads the Old Mutual quantitative team.  The managers use a data model to identify stocks which incorporates a quality element, allowing the model to shift between value and quality to reflect the changing market dynamics. In addition, the managers also analyse four further components: market dynamics, sustainable growth, company management, and analyst sentiment. The importance of each factor varies, allowing the fund to shift towards the stocks that are likely to perform in the prevailing market environment. The flexibility and dynamic nature of the approach has helped the team avoid areas prone to overcrowding and mitigate risk in falling markets.
• JPM US Equity Income – Manager Clare Hart focuses on companies with attractive dividend yields (at least 2% at purchase) but with high levels of dividend cover. This means she sticks to high-quality companies, which she defines as those with durable franchises, a consistent earnings stream, high returns on invested capital, conservative financials, and strong management. As a result, the yield on the fund will be more conservative but this should help with delivering longer term returns. Hart pays attention to price risk and tends to favour companies with large economic moats