The fund we’ve bought to play recent US rally

 

US markets bounced back in October, and Saltydog Investor is hoping the market continues its fine form.

 

September was the worst month for US stocks since last March. The Dow Jones Industrial Average fell by 4.3%, the S&P 500 was down 4.8% and the Nasdaq lost 5.3%. However, in October, US markets bounced back. The Dow Jones made 5.8%, the S&P rose by 6.9%, and the Nasdaq beat them both, up 7.3%.

There were several reasons for the downturn in September, chief among them inflation becoming an increasing concern for investors.

With the help of Covid vaccines, we are starting to get on top of the pandemic and people are finally going back to work. This is creating a demand for goods and services, which cannot be met.

Complicated supply chains have been disrupted and it will take time to get them back up and running. In the meantime, there is a shortage of commodities and prices are rising. In September, the annual inflation rate in the US reached a 13-year high of 5.4%.

During lockdown, governments and central banks ploughed enormous amounts of money into their economies to try and stop them from collapsing. In the US, the Federal Reserve has been buying bonds at a rate of $120 billion a month and at the same time interest rates have been kept at all-time lows.

This has been great for investors, but at some point the government support will have to be reduced. With the threat from coronavirus diminishing and inflation rising, it is getting increasingly difficult for governments to justify the amount that they are spending.

These are global problems, but there was also an issue specific to the US. From time to time, the US government needs to raise its debt limit (the total amount of money that it is authorised to borrow to meet its existing legal obligations).

There was talk of them running out of cash sometime in October, and for a while it was not clear that the Democrats would get the support that they needed from the Republicans to allow a vote in the Senate.

In the end, the Democrats and Republicans cobbled together a deal, although it only lasts until early December. Jerome Powell, the chair of the Federal Reserve, also said that although inflation would remain higher for longer than expected, he thought that it would drop back towards the 2% goal.

 

	Stock market indices 2021
Index	1 Jan to 31 March	1 April to 30 June	July 2021	Aug 2021	Sept 2021	Oct 2021
FTSE 100	3.9%	4.8%	-0.1%	1.2%	-0.5%	2.1%
FTSE 250	5.0%	4.0%	2.6%	5.0%	-4.4%	0.3%
Dow Jones Ind Ave	7.8%	4.6%	1.3%	1.2%	-4.3%	5.8%
S&P 500	5.8%	8.2%	2.3%	2.9%	-4.8%	6.9%
NASDAQ	2.8%	9.5%	1.2%	4.0%	-5.3%	7.3%
DAX	9.4%	3.5%	0.1%	1.9%	-3.6%	2.8%
CAC40	9.3%	7.3%	1.6%	1.0%	-2.4%	4.8%
Nikkei 225	6.3%	-1.3%	-5.2%	3.0%	4.9%	-1.9%
Hang Seng	4.2%	1.6%	-9.9%	-0.3%	-5.0%	3.3%
Shanghai Composite	-0.9%	4.3%	-5.4%	4.3%	0.7%	-0.6%
Sensex	3.7%	6.0%	0.2%	9.4%	2.7%	0.3%
Ibovespa	-2.0%	8.7%	-3.9%	-2.5%	-6.6%	-6.7%
RTSI	6.5%	12.0%	-1.7%	3.6%	5.6%	3.7%

 

Source: Morningstar. Past performance is not a guide to future performance

 

US funds are on the up

 

In our weekly Saltydog analysis we have seen the performance of the North America and North American Smaller Companies sectors steadily improving. We combine these two sectors in our reports and, when we looked last week, they were at the top of our ‘Full Steam Ahead Developed’ Group with a cumulative four-week return of 1.7%. They were up 4.3% over 12 weeks and 9.2% over 26 weeks.

 

The best-performing funds over 26 weeks made more than 13%.

 

 

At the end of September/beginning of October, our demonstration portfolios reduced their overall exposure to the equity markets. Last week, we started to reinvest. One of the funds we picked was the UBS US Growth fund and it is already showing a gain of 0.9%.   

Today, the Federal Open Market Committee meets and is expected to discuss the ‘tapering’ of its Covid-era asset purchases. If it wants to move quickly ,then I would expect the US markets to drop again, but if they take a more gradual approach the recent rally may continue.

For more information about Saltydog, or to take the two-month free trial, go to www.saltydoginvestor.com