The health of the U.S. economy has a major impact on the prosperity of international investors, as the market capitalization of U.S.-based companies is dominant (often more than 50% of global indices). The recent growth in US equities, particularly in the technology sector, has exacerbated this problem, with many US stocks showing a P/E above 30.
Here is a quick inventory of signals and indicators to watch out in order to try to avoid unpleasant surprises and not to invest at the peak of the US markets:
Arguments for a continued US bull market in the medium term:
- The Fed has promised to keep interest rates low for years and to continue to buy dollar bonds;
- It appears that a functioning economy may prevail for the next few years in the U.S. and the Fed intends to maintain an accommodative monetary policy to support its businesses and markets;
- Spending less than disposable income during the pandemic could allow for a post-crisis increase in consumption.
Factors that may trigger a bear market:
- The biggest risk to high asset prices is the possibility of further interest rate hikes as in recent months;
- The Fed can keep interest rates low and borrow unlimited amounts of money for years to come, but not indefinitely;
- International trade issues, particularly in the U.S. relationship with China, could limit growth;
- Social divides and unemployment in the U.S. are unlikely to be resolved any time soon;
- Warren Buffett’s key indicator (the ratio of total equity market capitalization to GDP) is well above previous standards; the P/E indicator is also at a high level;
- Occurrence of excessive behavior on the stock markets with the uncontrolled use of derivatives and margin by inexperienced players.
It seems that the positive points dominate in the short and medium term, but that the problematic factors are deep and could materialize in the longer term, especially if expectations on technology stocks do not materialize or if interest rates rise. Despite this high price level, stock prices may continue to appreciate during this year, even in the US. A continuation of high returns after inflation in the longer term seems however difficult to envisage. Caution is therefore called for and I will personally be significantly underweighting my investments in US securities over the next few months.
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