Weekly Update

Global Markets are Relatively Cheap

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Published April 7, 2017


Below is an excerpt from a recent commentary by investment firm Per Sterling that we think provides a good overview of the perspective of many market analysts at this point. Of course, TimingCube’s models are not driven by any of the fundamental or valuation factors described in this article; but instead are focused on price and volume in the market (e.g. supply and demand). We provide the following as interesting information only:

The post-election rally pushed stock prices notably higher leading many analysts to declare the U.S. stock market grossly overvalued. This will be especially true if the underlying factors of the rally – namely President Trump’s corporate tax reform – fail to materialize in a timely manner. Despite concerns over U.S. equity valuations, and all of the uncertainty coming out of Washington D.C., we believe that equities will nonetheless benefit from one massive, macro-economic and redeeming factor, which is that the rest of the world is finally emerging from the global financial crisis, and that foreign markets are likely to play “catch-up” with the domestic economy and markets, which already reflect so much of the economic recovery.

Chart 1: In which region are equities most overvalued/most undervalued?

Valuation of Equities in the Region

Indeed, it makes sense to us to 1) maintain a healthy exposure to domestic equities, while being careful not to over-emphasize trades that rely too much on the passage of the Trump agenda, and 2) add to your foreign equity allocations. You will see much of the justification for this comment in the above chart that shows which global markets professional money managers consider to be over and undervalued. While there is a consensus opinion that the U.S. markets are egregiously overvalued, there is a similarly strong consensus that Britain, continental Europe, Japan, and the world’s emerging markets are compellingly undervalued.

Chart 2: Still a bargain – European stocks are about 18 percent cheaper than U.S. peers

European stocks vs U.S. stocks

Europe is probably the most compelling market of all, as attractive valuations are being paired with decreased political uncertainty, with recent elections in Austria, Spain, Bulgaria, and The Netherlands producing very pro-European Union results, the polls in Germany showing a resurgence in the popularity of Angela Merkel, and a decreasing potential for a Le Pen victory in France. On top of everything else, the European economy is really starting to surprise on the upside. We think that it is time to update your passport.

Market Update

Stocks endured a bit of a bumpy ride en route to a flat weekly tally. Monday’s session showed a -0.2% move as weak auto sales kept pressure on retailers and money moved into bonds ahead of the meeting between President Trump and Chinese Premier Xi Jinping later in the week. Rumors of a value-added tax proposal kept retail stocks off-kilter Tuesday though the broad market traded in a tight range and closed flat. A solid employment report from employment contracting firm ADP kicked stocks higher early Wednesday. But minutes from the Federal Reserve meeting which included comments about an “overvalued” stock market unnerved investors sending stocks downward in the afternoon. The market closed -0.3% lower after being up by +0.5% in the morning. It was the worst reversal of fortune for stocks in a year. The reversal increased concern among market analysts that stocks are barely holding on to their uptrend as economic data has been soft of late, and the Trump tax reform package appears further and further away in being proposed. However, stocks returned to their sideways trading mode Thursday with a +0.2% move on little new information. Overnight air strikes from the U.S. on Syria caught investors off-guard but ultimately had little impact on stocks once trading began. The government’s monthly employment report was a disappointment though stocks appeared to shrug off the report with interest rates moving little and stocks once more closing flat. For the week, the S&P 500 (SPY) dipped -0.24% while the Nasdaq 100 (QQQ) -0.31%. The smallcap Russell 2000 (IWM) continued to reflect the lack of economic upsides with a -1.43% weekly loss and has now spent four months running in place.

Warm wishes and until next week.