US stocks leave others behind – another cause for concern?

Is this a cause for concern? If an investor is hunting for bargains, then they may be much harder to find in American indices. On a book value basis, the S&P 500 (the benchmark US index) trades at a two-times premium to the rest of the world, and is at a record premium using a price-earnings (PE) valuation. But for traders, it makes sense to stick with the strongest indices for longs, and seek out the weakest for shorts. In the past few months, we have seen European and Asian markets fall, with lower highs and lower lows on charts a prominent feature, ie each rally is unable to move above the previous high, and instead sees fresh declines that create new lows. This is a sign of a downtrend, and will continue to be an advantage for traders prepared to range widely across indices.

Analysts are split on whether the current state will end with US markets falling back to close the gap, or everyone moving higher. For those constantly calling for a decline in global stocks, the disparity is yet another reason to be bearish.

But as we discussed in our previous article about the ‘skew’ in the S&P 500, most indices can be below average and yet the overall global index can still rise. The US outperformance has been driven by solid economic and corporate fundamentals, as this week’s Automatic Data Processing (ADP) numbers have done for the former and the upcoming third quarter (Q3) earnings season will do for the latter, and by a ‘flight to safety’ as investors abandon markets that they fear will be hit hard by trade wars.

Investors hunting for bargains might have to look outside the US, but for traders looking to capture medium or long-term upside, ignoring the US at all-time highs might lead to reduced returns. The strongest are usually that way for a reason, and it is futile to try and guess when the current pattern will reverse.