Hurricane Sandy to put US recovery on hold
Rathbones’ Julian Chillingworth says that while fundamentals look promising in the world’s largest economy, he predicts plenty of turmoil in the short-term.
Those interested in history may reflect that the UK market crash in October 1987 was prefaced by a devastating storm across southern England, forcing brokers and investors to remain at home.
As highlighted in one of the broadsheets, the market had enjoyed a strong performance over the previous year, up 46 per cent, apart from a pause in March.
It was trading on a P/E of 13x, before plunging by one-third. We have seen the US rally by 33 per cent over the last year, with a minor setback in March; it is now trading on 13x. As Mark Twain is often quoted as saying: “History does not repeat itself, but it does rhyme.”
The economic impact of Hurricane Sandy on the US east coast economy will take a little while to assess. Aware, of course, that the cost to human life is the most significant, the US is likely to experience a drag on its economic growth.
The cost to insurers will be immense and retailers are likely to suffer too, although supermarkets may have benefited from stockpiling.
So far, steps taken to kick-start the US economy are bearing fruit, with four key indicators – industrial productivity, real income, employment and real estate sales – all continuing to signal a positive trend. Consumer spending data has also shown a rise of 0.8 per cent in September, more than forecast.
Although the move has generated both positive and negative reaction, the US Fed has significantly changed its monetary policy by shifting its focus on reinvigorating employment levels above controlling inflation.
This third bout of quantitative easing comes at a time of increasing shale gas discoveries, raising the prospect of lower energy bills, which should theoretically help US competitiveness.
Both the US and UK governments have used QE to help shore up their respective economies, but whereas in the UK, this funding is log-jammed by banks keen to repair their balance sheets, those US banks that opted to take an early and substantial hit to capital are now in a position to lend.
While the US housing market lay at the epicentre of the financial crisis, it is now undergoing a revival, as unsold inventory has been cleared in several states.
House prices have recently increased, and new home sales are on the rise. This has substantial implications for the overall economy as there is a strong correlation between house prices and consumer confidence.
What does this mean for investors? An improving fundamental picture is likely to act as a significant stimulus. US equity markets already reflect some of these factors, thus the market is rated more highly than its developed market peers, particularly Europe.
In a low-growth environment, it is important not to over-pay, and investors must be wary of the forthcoming “fiscal cliff” (when tax cuts expire as spending cuts are initiated, at the end of the year), and make use of weakness to invest in a market where the prospects for recovery and growth in the long-term are more visible.
In the short-term, however, with a post-election policy hiatus approaching, and uncertainty to the dollar-cost of the hurricane, investors may have to be patient.
Julian Chillingworth is chief investment officer at Rathbones. The view expressed here are his own.