How Can You Take Advantage of the Historically High US Stock Market?

If you’ve been following Donald Trump on Twitter, you will have learned a few vital things; that he is a “very stable genius”, and that the US stock market has broken new records under his tenure.

This second point has grabbed the attention of investors from across the world. In the first couple of weeks of January 2018, both the Nasdaq and the S&P 500 broke new records, during a six-day streak[1] of rarely-seen market gains. Indeed, within the first couple of trading days in January the S&P 500 broke through the 2,700 barrier for the first time ever[2], while the Dow Jones Industrial Average made history by rising above 25,000 just a couple of days later[3].

According to analysts, these US stock market gains are down to a number of factors. A recent surge in oil prices has helped energy companies after a few years of under-performance.

Meanwhile, a recently-passed tax bill is widely expected to aid corporate earnings, fuelling investor optimism.

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So how can UK investors access these returns?

For investors seeking exposure to the US stock market, a wealth of options is available. The easiest way to start is by sourcing an exchange traded fund (ETF) which tracks the top performers of the New York Stock Exchange (NYSE) or one of the three main US indexes: the Dow Jones, Nasdaq and the S&P 500.

ETFs are low-fee investments which mirror the performance of different markets or sectors, so you benefit when the market goes up, without having to face huge commission fees.

World class investor Warren Buffet has said that retirees should put ten per cent of their funds into short term government bonds, and the remaining 90 per cent into an S&P 500 ETF[4], confirming the popularity of these funds, and the long-term prospects of the market.

Alternatively, UK-based investors can seek out mutual funds or ETFs which have come with ready-made exposure to some of the more significant US stocks. Apple, Tesla, Google (which trades as ‘Alphabet’) and Microsoft are among the most popular and profitable stocks in the world, and they regularly appear in mainstream managed portfolios – both in the UK and abroad.

Finally, investors could circumvent funds completely and buy US stock directly from a professional broker.

This offers the flexibility to invest in just one or two stocks, and avoid others completely. However, this degree of focus will come at a price. Most brokers charge hefty trading fees for US stocks, as well as a premium for trading in a different currency. The pound has been trading at a low against the dollar since June 2016, with one pound equal to just $1.36 at the time of writing, so this will have to be factored in before any money changes hands.

On top of the poor exchange rate, investors will also have to pay a commission charge to the trader. Cumulative expenditure from fees can quickly add up, and may counteract any of the profits made from your US stocks investments – if you are considering the direct stock market route, these costs should always be factored in.

If you do want to self-invest through a stocks and shares ISA or a personal trading account, it is mandatory that you fill in a W-8BEN tax form first. Your service provider or investing may assist with this with a series of questions.

But should you invest in US stocks?

While it is not difficult to access investment opportunities on the US stock market, there is a bigger issue to consider – should you invest in US stocks?

It is worth noting that despite the president’s tweets, the current stock market boom is not all that unprecedented. In fact, during Barack Obama’s presidency, the market did considerably better.

Within 234 market-days of Obama’s inauguration, the Dow was up by more than 31 percentage points. During the first 234 days of Trump’s presidency, it gained 24.8 percent[5].

Furthermore, the recent stock market rises have not been limited to the US alone. In Japan, the Nikkei has been breaking its own records, while Germany’s DAX and Hong Kong’s Hang Seng market have also been outperforming[6].

Some high-profile financiers have been warning[7] that 2018 could see a stock market crash in the US. As a result, wary investors may prefer to reduce their risk and increase their returns by investing in a global equities portfolio instead.

[1] https://www.cbsnews.com/news/stocks-perfect-2018-winning-streak-finally-ends/

[2] https://www.bloomberg.com/news/articles/2018-01-03/s-p-500-crosses-2-700-as-record-breaking-streak-resumes-chart

[3] https://www.cnbc.com/2018/01/04/dow-25k-us-stocks-jobs-data-adp-economy.html

[4] https://www.investopedia.com/investing/top-sp-500-etfs/

[5] https://www.washingtonpost.com/news/politics/wp/2017/12/27/one-of-trumps-main-arguments-for-his-success-is-the-rise-in-the-stock-market-how-impressive-is-it/

[6] https://www.xm.com/stock-market-news-european-open-dax-records-fresh-record-high-boosted-by-weaker-euro-nikkei-at-highest-since-1992-62405

[7] https://www.cnbc.com/2018/01/09/legendary-investor-bill-miller-market-could-be-headed-for-a-melt-up-of-30-percent.html

Kathryn Gaw

Kathryn Gaw is a financial journalist based in Belfast, Northern Ireland. She has been writing about personal finance and investment trends for more than a decade, and her work has been featured in the Financial Times, City A.M., the Press Association, and The Irish Independent, among many other publications.