EDITOR'S LETTERJohn Stepek
Is the US stockmarket in a bubble? One of the world’s top bubble spotters doesn’t think so. Jeremy Grantham, well-known value investor and co-founder of US asset manager GMO, told The Wall Street Journal’s James Mackintosh that he doesn’t see any signs of the euphoria that traditionally attends a bubble. He pointed out that, until recently, investors were happy to stick their money in “safe” government bonds paying negative interest rates. This, he says, is not emblematic of a “mad desire to invest in the stockmarket”. So is he piling in? Not for a moment. US stocks are expensive, no doubt about it, he says. But he might think about buying on a “dip” of 15%-20%.
So what, if anything, justifies current valuations in the US? Michael Batnick, who writes for The Irrelevant Investor blog, highlights a paper by Michael Mauboussin and his team at Credit Suisse (one that we covered on the strategy page in MoneyWeek a couple of weeks ago). The paper looks at the fact that the number of firms going public in the US has fallen by half over the past 20 years. One side-effect of this is that those companies which are listed are both more mature and more profitable. On one measure, margins have risen from 5.5% on average pre-1996 to 9.1%. Grantham makes a similar point, and you could certainly argue that a market made up of more profitable companies should trade at a premium to one composed of less profitable ones. That said, notes Batnick, even if stocks aren’t “really” expensive, they’re at best, only “sort-of” expensive.
The thing is, US stocks have been expensive to one degree or another for several years now, on almost any measure you care to mention. So the fact that they’re approaching record valuations now is no guarantee that they won’t continue to sail on higher. So what’s an investor to do? You could decide to dance around on the side of the volcano and hope that it doesn’t erupt any time soon. Alternatively, you – as an individual investor – could exploit your one big advantage over the likes of GMO and other asset managers, which is that you don’t have to worry about your clients abandoning you if you aren’t fully invested in a rising market.
You don’t need to own the world’s most expensive market, even if it is going up. Instead, hunt for value. We look at the latest updates on Cape ratios for global markets on page ten (where we remind you what the Cape is too). The US is the second-most expensive market in the world on that measure (Denmark is the most). The cheapest include troubled eurozone players Italy and Portugal. But this week’s cover star – Poland – also makes an appearance. You can read more on how to invest in one of Europe’s most under-appreciated markets here.