Wednesday, January 11, 2017

US Stock markets and Reversion to the mean

I would like to say that when the market embarked on bull market in 1991, interest rates say on treasuries were still around 8-9% and we had a big correction in 1987 whereby the valuations of stocks in 1990 were not particularly high. Valuations of US stocks today are very high.

Also in the 1980's, do not forget the US market had significantly under-performed emerging economies in particularly Japan. The Japanese markets was the story of the 1980's. By early 1990's, the market in the US was relatively inexpensive compared to stock markets overseas but this is not the case at the present time.

If you look at that figures or charts that go back 30 years. the US market has never been this expensive compared to other markets in the world then it is now and I believe whether you are contrarian or not, eventually there is a reversion to the mean.

I believe the stock market in the US will either go down more than emerging markets because we are in a global bear market or emerging economies stock markets will go up more than the US if the super bulls are right. But we have very strong headwinds.

One of the headwinds is obviously if the economy strengthens a lot, I think that consumer price inflationary pressures will come up and that interest rates will go up. Once the 10 years yield goes to around 3%, the stock market will notice and those stocks will face this headwind of rising interest rates.

Secondly, do not forget if the US dollar is strong, it means that foreign earnings of American companies are translated into dollars in the US and so the earnings of multinationals will suffer. Also, if the US dollar is very strong , it is a symptom that global liquidity is tightening and when the dollar is very strong, usually stocks do not perform particularly well.