The only way to make sense of the US market now is to consider valuation

7th September 2012

Starting with the positives, some of the more encouraging pieces of macroeconomic data published  recently have related to the US housing market, which we last addressed in Reverting to type. Some commentators have described it as looking "conspicuously cheap" versus history on a number of different metrics – particularly the important consideration of affordability.

Regular visitors to The Value Perspective will know how keen we are on mean reversion and so, with the US housing market looking so cheap, if it were even to move back up to average levels over the coming years, the housing and real estate sectors could make a significant contribution to the country's GDP. That is not to say it will but it could – and that is quite a positive for the US economy.

Clearly, on the flipside, some poor macroeconomic numbers are emerging from the other side of the Atlantic. To pick out just three, we have seen the ISM – the measure of business sentiment that is the US equivalent of Europe's purchasing managers' indices – looking very weak, consumer confidence surveys collapsing and numerous corporate earnings downgrades.

In short, there are lots of things that should make investors very nervous indeed so how can we square that with the positives mentioned earlier? To our way of thinking, the only way you can prevent yourself running round in circles in this sort of situation is to consider valuation.

Unfortunately, that is probably the aspect that should make investors more nervous than anything else. On the whole, the valuation of the US market looks expensive – particularly in the context of cyclically-adjusted price/earnings (P/E) ratios such as the Graham and Dodd P/E.

Within the US market, there are of course some undervalued sectors – in articles such as Social not-working, we have, for example, talked about how cheap the valuations of many big blue-chip software companies are looking. But individual sector valuations are not the same as the valuation overall and, on average, the US stockmarket looks expensive relative to history.

Continue reading…

 

More from The Value Perspective:

Investors should continually challenge their perception of a business

Tax avoidance schemes under scrutiny

RSA may not deserve all the respect the market is showing it

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The Financialist

1 thought on “The only way to make sense of the US market now is to consider valuation”

  1. David Lilley says:

    I am so appreciative of your blogs. I have recommended them to many and even introduced them to Stephanie Flanders and Robert Peston of the BBC.

    As a result Stephanie has mentioned you in her blogs. I hope that you don’t mind.

    There is one big issue facing recovery. When will US QE taper?

    I, for my part, have recommended that the Fed switch from untargeted/indiscriminant QE to a “Funding for Lending” scheme where easy money is targeted at World 5. Where World 5 is the corporation, the limited libaility company, the entity that puts World 4, objective/scientific knowledge to work. The entity that has showered mankind with wealth for the last 200 years. Fed tapering would therefore continue to direct liquidity to the right place and not the wrong place, home price escalation.

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