Is it time to take stock in the U.S. market? Equities started the year strong as the U.S. economy sidestepped the worst-case fiscal cliff scenario and continued showing signs of improvement despite global economic uncertainty. In fact, the Dow Jones Industrial Average reached a record high in early March. While there are still a number of possible issues that threaten to derail the market (particularly related to government spending and debt), Grant Bowers, portfolio manager of Franklin Growth Opportunities Fund, believes economic resilience in the United States is encouraging news for stocks, and investors have taken notice.
Bowers makes the case for U.S. equities.
“U.S. corporations appear stronger than ever. We view the U.S. as extremely well-positioned globally, with a strong, mobile and highly productive labor force. We are seeing low levels of wage inflation in the U.S., and recent energy discoveries are really helping create a low-cost structure for many U.S. manufacturing companies in particular that should benefit them for many years to come.
“In my view, U.S. corporations are also well positioned to take advantage of the improving global growth outlook with strong brands and quality products sold into the global marketplace. Currently, we see U.S. corporate profits near record levels and cash on the balance sheet near all-time highs. Many U.S. companies exited the global financial crisis stronger, leaner, and more competitive than they entered.”
Volatility, Growth — and Opportunity
While he can’t predict where the markets may be headed next, Bowers does think there are opportunities to be had in U.S. equities.
“The type of companies that we think will do well in the market will have strong and defensible competitive positions, have quality financials and strong management teams, and they will be leaders in their industry.
“We have been examining the ramifications of slowing growth in other parts of the world on U.S. companies with multinational exposure. We have been finding opportunities to add to companies with higher domestic exposure to the U.S. that we believe can take advantage of trends we have been seeing domestically.”
One of these trends is manufacturing. Bowers reports that the sector continues to grow, and a number of multinational U.S. companies have announced they would bring jobs back to the United States. Bowers sees this “manufacturing renaissance,” as a potential long-term market driver.
“A confluence of factors augments this view, including rising labor costs in India and China, abundant shale discoveries in North America leading to lower natural gas prices, a declining U.S. dollar, and higher shipping costs. Increasing manufacturing capabilities could lead to U.S. job creation as more plants are developed onshore, which has a potential trickle-down effect on such important economic areas as housing and consumer demand.”
Manufacturing isn’t the only area where Bowers sees growth occurring; the housing sector has also been recovering from the depths of the 2008-2009 financial crisis. In January, purchases of new homes rose to the highest level since July 2008, while existing home sales and housing prices have also increased. Bowers explains the importance of this sector to the economy.
“We believe the housing sector plays a crucial role in stimulating the economy due to its ability to create personal wealth, improve consumer confidence and, in turn, potentially energize consumer spending—an important fuel for gross domestic product growth.
“Other positives include a steady rise in commercial lending, a significant drop in the household debt burden, and the newly accessible abundance of low-cost natural gas. We believe these trends point to continued moderate economic growth, provided that fiscal issues are constructively addressed.”
While consumers may have gotten their fiscal houses in order, the U.S. government still hasn’t. And that’s a risk to the outlook, says Bowers. A long-term plan to reduce the deficit still hasn’t materialized.
Assuming government leaders can come up with some sort of viable plan, Bowers believes the U.S. is well positioned in the global economy, which should be a positive for equities.
“We believe the opportunity to set the U.S. on a path toward fiscal sustainability over the next decade may provide a meaningful stimulus to the U.S. economy, companies, and equity markets overall. The country’s corporate sector appears financially strong and competitive, and many stocks remain inexpensive relative to historical valuation levels, in our view. We expect gradual economic recovery in the U.S. to continue, fiscal issues to be addressed, and increased investor confidence going forward.”
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What Are the Risks?
All investments involve risks, including possible loss of principal. Stock prices fluctuate, sometimes affecting individual companies, particular industries or sectors, or general market conditions. The fund may be more volatile than a more conservative equity fund and may be best suited for long-term investors. The fund’s investments in smaller- and mid-sized-company stocks involve special risks such as relatively smaller revenues, limited product lines and smaller market share. Smaller- and mid-sized company stocks historically have exhibited greater price volatility than larger-company stocks, particularly over the short term. The fund may focus on particular sectors of the market from time to time, which can carry greater risks of adverse developments in such sectors. These and other risks are described more fully in the fund’s prospectus.