US stocks are the most expensive in the world

Posted on 09 June 2014 with 1 comment from readers

Even the exuberantly priced Dubai Financial Market struggles to top shares in the United States when it comes to over-valuation. The US came number one in the main measures of value against historic average in a weekend global survey by The Daily Telegraph (click here).

On price-to-earnings the US scored 19.20, on the lesser known cyclically adjusted p/e it was pipped by Indonesia at 27.34 to 24.51, although runner-up, and on price-to-book Pakistan and Indonesia inched ahead. The DFM with a p/e of 17.4 looks comparatively inexpensive.

US growing or not?

Emerging markets are often prone to wild swings in stock market sentiment. They do also often have bouts of very strong GDP growth that justifies huge share price values. What of the US then? It’s economy contracted in size by one per cent in the first quarter, and yet its stock market still continued to go up.

It now seems as if trying to reach the Numero Uno’ position is easier than maintaining the same. The stocks listed in the US market are regarded as the highest for many valid reasons, the stability and strong economic policies of the country to name as the basics. Pitfalls are present even at the supreme level and saving assets from them is a menace of a task.basics

We are now told that unemployment data last Friday justifies a belief that the second quarter will be better, though GDP forecasts have already been knocked back to three per cent, albeit positive this time. In truth the data was in line with a modestly improving to flat economy with the labor participation rate’s all-time low consistent with a recession.

That is totally at odds with stock market sentiment and new all-time highs. Wall Street is behaving like an emerging market in its early growth phases. Admittedly the spike in stock prices of last year is history and this looks more like a topping out pattern than anything else, but it is extraordinary.

Investor logic

Investors are always advised to buy cheap and sell high. Why are they doing the reverse now? Actually they are not as trading volumes have been sinking for years. It’s the increasing concentration into the stocks that make up the major indices that keeps the market rising.

How much longer can US stock indices continue to be the most highly valued in the world? The law of mean reversion in markets has not been revoked in a constitutional ammendment, and neither has the law of gravity.

There is only one way to go when you get to number one and that’s back down. You’re at your most vulnerable when you are on top.