A favorite recent saying among traders is, “The U.S. is the best of a bad bunch.” The U.S. outperformance in 2013 vs. other global equity markets has been exceptional. So exceptional in fact that of 28 Country ETFs that the stellar team at Bespoke highlighted yesterday, only the U.S. and Japan were short-term overbought:
The SPX index has now rallied almost 100 points from its June 24th low, a spectacular rally in just 11 trading days. Meanwhile, most global equity markets have hardly recovered, with the exception of the other leader in 2013, Japan. It’d be one thing if the U.S. market was rebounding from a significant selloff. But in fact, it is now once again near all-time highs.
Again, the argument goes, well the U.S. is the best of breed market. Europe, China, Asia ex-Japan, and other emerging markets are all struggling much more than the U.S. Naturally, the U.S. equity market is going to lead. But the real question is, how much of this U.S.-centric optimism is already priced in?
In the current environment, most equity investment options globally have gotten cheaper in the past couple years, while the U.S. has gotten more expensive from a price/earnings ratio perspective. With that in mind, at some point, global investors must decide that the risk/reward is better elsewhere, simply since valuations have gotten so much cheaper vs. the U.S. To get a sense of how much cheaper, here is a table from Barry Ritholtz’s TBP blog last week showing the expensive nature of the U.S. vs. almost all global equity markets:
The fundamental comparison is getting progressively worse for the U.S. as other global markets sell off. That’s part of the reason why it’s rare that you see one of the large developed markets move on its own when most other global markets are moving in lockstep.
The U.S. is in a stronger economic position than most of the countries on that list. But does that justify a valuation at more than 2x many of the others? That’s the real question we should be asking, instead of simply whether the U.S. is the best of a bad bunch.