June 15, 2017 by tradersnote
If you have been asking yourself the question: ‘Should I buy US stocks?’ then you will be interested to hear some informed opinions on the subject that were circulating among financial analysts from around May of 2017. The predictions did not seem, at that time, to be encouraging for those who wondered: Should I buy US stocks? In fact, the suggestion was that investors should look instead to invest in developing economies. At the base of this fundamentally pessimistic analysis of the future of US shares was a particular price to earnings ratio, the so-called Shiller PE which compared prices to earnings averaged over a ten year period. It is often difficult to correctly interpret some statistical analyses since unless you have a background in both statistics themselves and also the market which they are being used to analyse than one result can seem to contradict another. It is important to realise that this particular price to earnings ratio is one that is respected for its predictive and diagnostic abilities. This Shiller analysis suggests that whilst international stocks tend to average a price to earnings ratio of 14 to 15, that is the price is 14 or 15 times earnings. In the USA, however, the ratio is almost twice that level, coming in at 29 times earnings. The disparity between price and earnings might seem an ominous sign in its own right. When you consider that the markets have only twice reached these levels in all known economic history, and that these all-time highs occurred immediately before the tech bubble burst and before that in 1929, the year of the Wall Street Crash which in motion the recession of the 1930s; then you would be forgiven for thinking that things sound even more worrying.
So in May of 2017 the answer to the question: ‘Should I buy US stocks’ would seem to have been an emphatic ‘no.’ As we noted earlier international stocks were showing a price to earnings ratio of 14 to 15, which was considered reasonable. Stocks from emerging markets were showing ratios of 11 and 12. The opportunity was thus present for investors to snap up a selection of promising stock at a very reasonable price. However the dire predictions and observations gleaned from the US price to earnings ratio should not be forgotten, nor should the consequences of the last two occasions on which the US market stood at such a high p. to e. Ratio. The Crash of 1929 and the collapse of the tech bubble had worldwide ramifications which caused losses to many stockholders. Of course, looked at Conversely, there are always ways to take advantage of a changing market; those asking themselves the question: ‘Should I buy US stocks’ in 2017 would probably have been better advised to look into alternative strategies, at least for the moment. They should also, of course, remember the fluid nature of stock and share prices, and keep a finger on the pulse of the latest developments.
Spread betting, CFD trading and Forex are leveraged. This means they can result in losses exceeding your original deposit. Ensure you understand the risks, seek independent financial advice if necessary. The value of shares and the income from them may go down as well as up. Nothing on this website constitutes a solicitation or recommendation to enter into any security or investment.