Time to keep faith in the American dream when investing

These are unsettling times in the stock markets. The gyrations sparked by the emergence of the Omicron variant are particularly unnerving for anyone with money in American shares and funds, the anxiety being aggravated by the argument that Wall Street was already due for a correction. 

The S&P500 index has more than doubled since the start of the pandemic, even taking into account the sell-offs of recent days, outdoing the FTSE 100 with ease. 

Would saying goodbye now to America be a short-termist overreaction, or a level-headed decision based on the potential repercussions for the US economy from the new variant? As one analyst put it: ‘Nobody knows how this is going to play out.’ Another commented: ‘We’re swimming in the dark.’ Maybe true, but not helpful. 

When the professionals talk like this, it’s wiser to ponder your options, than to take precipitate action. 

The stimulus programmes from the central bank, the Federal Reserve, that have fuelled markets are set to be cut back earlier than expected.

Fed chairman Jerome Powell is warning of ‘the downside risks to employment and economic activity and increased uncertainty for inflation’. Previously Powell considered inflation to be ‘transitory’. 

Even before the Omicron news, Goldman Sachs was forecasting modestly below-average stock market returns next year, as a result of factors such as ‘decelerating economic growth’. 

However, as James Thomson, who manages the Rathbone Global Opportunities Fund, points out, US companies are increasing their profits more than four times faster than the rest of the developed world. He argues that ‘many of those competitive advantages are permanent’.

A reason to stick with US shares in the long term, then. 

Whatever unfolds in the longer run, there will be trouble ahead, with volatility likely to persist. But some of those who study the Vix Volatility Index, known as Wall Street’s fear gauge, believe its latest movements signal that Omicron’s impact may be short-lived. Since the S&P is dominated by tech companies, taking the decision to sell now would mean saying goodbye to Amazon, Alphabet, Apple, Facebook’s owner Meta, Netflix, Zoom and others.

These companies facilitated entertainment, education and ways to work during lockdown and have amply rewarded investors.

They are the mainstay of many popular international funds, like the GBP4.8billion F&C trust, for example. 

However, President Biden appears resolved to impose more regulations on the tech titans, reflecting a wider global shift. 

Yet optimism still surrounds the sector. As tech facilitated vaccine development through the use of AI (artificial intelligence), the emergence of the Omicron variant could ensure the sector’s role will now be ‘elevated to a whole new level’. 

Time to keep faith in the American dream when investing

Warning: Fed chairman Jerome Powell

At least, that’s the view of Ben Rogoff of the Polar Capital Technology trust. 

But even those who admire the global powerhouse that is America are turning more cautious. 

Pacific Asset Management’s Will Thompson cites the concentration risk in many portfolios, with investors unwittingly more exposed to the US than is sensible. If you are reluctant to abandon the American dream, look out for opportunities in old economy stocks like Coca-Cola and Kraft Heinz, both in Warren Buffett’s Berkshire Hathaway fund. 

The share price of Ford, an £80billion company, has surged since January.

The Mustang Mach-E, its electric sport utility vehicle, is popular and an electric pick-up truck is about to arrive.

Also there is still talk of a bid from Tesla, a company valued at nearly £1.1trillion. 

It’s worth too checking trusts such as JP Morgan American, which have shifted away from tech. Jonathan Simon, the trust’s manager explains. ‘As bottom-up stock pickers, we aim to find compelling opportunities, irrespective of short-term news flow.’ 

The trust is at a 2 per cent discount to the net value of its assets. 

I am keeping faith with America. But even before Powell conceded that inflation was no longer transitory, I put some cash into Ruffer, the defensive trust which pledges not to lose money. 

Its portfolio contains US Treasury inflation-protected securities, but is a tech stock free zone.

You can have too much of a good thing.