Strategy: US Stands Out.
Why have global investors been willing to pay a premium for US stocks during most of the current bull market? US stocks aren’t cheap compared to those in the rest of the world right now. A few strategists have said that now is the right time to buy more overseas, where there are better values than in the US. Joe and I are sticking with our “Stay Home” investment strategy as the better alternative to the “Go Global” one.
US stocks have sported a higher valuation historically for lots of reasons. Joe and I are studying them and will have more to say about them. For now, the US economy seems to be performing better than most others, as discussed below. It seems to be more diversified and resilient than most. It isn’t much exposed to the recurring EU/Eurozone economic integration crises. Both the Eurozone and Japanese economies are barely growing. China’s economy has become very dependent on government stimulus programs and easy credit to avoid a much faster slowdown than it is experiencing. Other emerging market economies also face lots of challenges, as most recently demonstrated by the attempted coup in Turkey.
Consider the following:
(1) Performance. We regularly monitor the performance of the US MSCI stock price index relative to the performances of the major overseas stock markets. Since the start of the current bull market on March 9, 2009, the US MSCI is up 204.4% to a record high, while the All Country World ex-US MSCI is up 84.4% in local currencies and 82.4% in dollars, though remaining below their previous record highs as well as below their most recent cyclical highs.
So far this year, the US is up 5.5%, while the rest of the world is down 2.5% in local currencies and up 0.1% in dollars. Here’s the ytd performance for some of the other major overseas indexes in local currencies: UK (6.9%), EM (5.7), EMU (-8.4), and Japan (-15.4). So far this year, the rebound in the Emerging Markets MSCI index has been led by big rebounds in Brazil (25.8) and Russia (11.0), both of which had been extremely depressed last year.
(2) Valuation. During the first week of July, the forward P/E of the US MSCI stock price index was 16.9, well above those in the UK (15.6), EMU (12.8), Japan (12.7), and Emerging Markets (11.8). Actually, the US has sported a higher valuation multiple than the rest of the world for most of the time since the start of the available data in 2001. Since then, the spread between the two has averaged 14.3%, or 1.9 P/E points, with the US at a discount just once, during June 2009 at the height of the financial crisis.
(3) Revenues, margins, & earnings. On a weekly basis, Joe and I track and compare forward revenues for the US MSCI to the comparable series for the Developed World ex-US and the Emerging Markets MSCIs. The latter two are in local currencies. US forward revenues has been relatively flat since mid-2014, when commodity prices started to drop. Over that same period, revenues declined in overseas developed and emerging economies.
The same can be said of forward earnings--i.e., that the US has been flat since mid-2014, while the rest of the world has been on a slight downward trend. Similarly, the implied forward profit margins have been relative flat for the US since mid-2014 and declining slightly overseas since then.
Dr. Ed Yardeni
is the President of Yardeni Research, Inc., a provider of independent global investment strategy research. To read more of his blogs, CLICK HERE NOW.
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