US stocks rose last week as the consumer discretionary, technology, and energy sectors led the advance. Home Depot, Lowe’s, Apple, Microsoft, Exxon Mobil, and Salesforce all posted solid weekly gains. A week ahead, Salesforce, HP, and Victoria’s Secret will all report earnings. Investing in these companies may prove rewarding for the long-term. A look at how to invest in US stocks is outlined below.
Small-cap indexes
While small-cap companies tend to be a more aggressive bet for investors, their growth potential may make them a better choice for short-term investors. These stocks tend to have lower share prices and earnings profiles than their larger peers. Furthermore, they may face greater market volatility than large-cap companies. But, despite the volatility, these stocks can offer significant growth potential for investors who can withstand the short-term fluctuations.
MSCI USA Small-Cap is an index that tracks the performance of the small-cap sector of the US stock market. It includes the 2,000 smallest firms that are part of the MSCI USA Investable Market Index. The index is weighted based on free-float market capitalization. Another popular small-cap index is the Russell 2000, which tracks the 2,000 smallest US companies. These companies represent about 10 percent of the total S&P 500 index.
Sector segregation
There is an important regulatory issue involving US stocks and the concept of sector segregation. The Securities and Exchange Commission (SEC) has a requirement that brokers separate their customer assets from the funds they use to trade. A broker may segregate customer assets in a number of ways, including using separate accounts for working capital and client assets. Brokerage firms are also required to report monthly on their reserve accounts and file monthly reports.
Another challenge is that segregation in markets tends to exacerbate minority disadvantages. The lack of diversity in a market tends to create demand for unscrupulous brokers. Segregation also places the financial needs of minority groups in the same geographical region. This makes it easier for brokers to target minority members for their services. But the problem isn’t just geographical; there are also legal challenges to sector segregation.
Price-to-earnings ratio
It’s difficult to believe that US stocks aren’t overpriced. The equity-price-to-earnings ratio has tripled from 1981 to 2000 and has only recently fallen. One explanation could be the fact that overseas investors are buying U.S. stocks in order to make a profit, but that would likely dampen the effects. After all, these investors are older than the U.S. population, so their buying power might offset any selloff that might occur due to the baby-boom recession.
According to BIS data, the price-to-earnings ratio of U.S. stocks is at nearly 30x, which is well above the average for the last 25 years, and double what it was from 1881 to 2017. In contrast, European equities are trading at roughly average levels for the last 25 years. If this trend continues, companies may choose to preserve capital through dividend policies and stock buybacks.
Growth avenues
A growing number of investors are looking beyond the US to new opportunities overseas. CK Narayan, MD of Growth Avenues, shares his insights on what he has been reading about the market and specific stocks. We’ll discuss some of these opportunities. Let’s start with Poland. The country of 38 million people is a booming tech hub. Its GDP is projected to grow faster than the U.S.’s, and its economy is benefiting from industrialization programs. Most Polish companies benefit from strong growth. They’re expanding their international presence, and that growth should translate into better earnings for these companies. Growth avenues for US stocks are numerous.
Several companies have strong innovation patterns. Some of them may have a loyal following and command a large market share. If a computer application company becomes a growth stock by being the first to provide this new service to consumers, it may have a higher growth potential. However, if it fails, it may be a mistake to invest in such companies. These investors should focus their money on companies with massive market shares.
Volatility
While investors typically view volatility in terms of high volatility and low volatility, recent developments show that the former is a different matter. Volatility is the variation of a financial asset’s price over a specified time frame. Traders calculate volatility using the standard deviation, or the difference between the average return and the average price. Over the past 30 trading sessions, volatility has risen by 123% and 74%, respectively. These numbers are the highest levels since the financial crisis, when volatility peaked at eight2% and 102%, respectively. In contrast, normal volatility is in the low double digits.
In recent weeks, the US stock market has been extremely volatile, with the Dow Jones Industrial Average making more than a thousand point swing in a single session. This has prompted many investors to think about whether the Fed will raise interest rates in the near future or if it will stick to its current plan of only four increases this year. Yet, there are also some analysts who believe policy makers could move more aggressively. JPMorgan boss Jamie Dimon has predicted that the Fed will raise rates seven times by 2022.