The financial press has been quite optimistic lately. Here is the Financial times starting March 15, for example:
“Stock markets around the world have hit record highs this year as investors become increasingly confident that central banks have managed to control inflation without triggering a recession.”
The Dow Jones Industrial Average in the United States, for example, closed at 39,131 points on February 23, an all-time high. It's slightly below that now, closing at 38,714 on March 15, but on a five-year chart, you have to look closely to see the swing.
How about the more representative S&P 500: the five hundred largest publicly traded companies in the United States? Another all-time high: 5,175 on March 12. The tech-heavy Nasdaq? The same story, with the addition that the impact of artificial intelligence increases the foam.
global euphoria
It's the same in other places. Japan's Nikkei 225 finally, 33 years later, broke through the 1989 market bubble and hit its all-time high. The EuroStoxx 50? Another all-time high. Germany's DAX? Yes, you guessed it: another all-time high.
And so on and so on. Among the main markets in the world, only Hang Seng in Hong Kong and ours FTSE 100 Break the trend.
In fact, the Footsie peaked at 8,004 on February 17, 2023 (i.e. just over a year ago) and has swung lower since then. In its most recent decline, in the fall, it reached 7,291.
And needless to say, many investors feel like they're missing out.
Chatting to some investors in my social circle, I hear about money being taken out of London and invested in the S&P 500, usually in the form of ETFs, but sometimes with some tech giants added to the mix.
London, they say, doesn't look attractive.
Considerable disparities
And at first glance, they are right.
In five years, the Dow Jones has risen 52.2%. The S&P 500, 82.7%. Nasdaq, 108.9%.
The London Footsie? A somewhat more modest 7.2%.
You might think that moving from London to New York is a no-brainer. Just like with that famous movie scene in when harry met sallyyou will have some of what they are having.
But that means overlooking two quite central points.
Think before you jump
First of all, these are markets that are at all-time highs. Is now In fact Is it time to buy them? Of course, it's tempting not to want to miss the boat. Momentum may very well push things upward, and probably will, in fact.
But still, an all-time high is an all-time high. It certainly doesn't scream “offer.”
And relative valuations tell the same story. The US Dow Jones and S&P 500 indices have price-earnings ratios of around twenty points. Do London Footsie and FTSE-All share? Less than half.
In short, in terms of valuation, the United States is twice as expensive like the UK.
Warren Buffett's hamburger analogy
As always, investing legend Warren Buffett puts it well.
“If you plan to eat hamburgers your entire life and you're not a livestock producer, should you want higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not a car manufacturer, should you prefer higher or lower prices?
As he points out, these questions answer themselves. But now let's ask the question again, but in the context of stock markets and share prices:
“If you expect to be a net saver over the next five years, should you expect a higher or lower stock market over that period?”
Once again, the question answers itself. So why do so many investors rejoice when their portfolios hit new highs, fueled by rising stock markets, making future stock purchases more expensive?
Don't look there, look here
The moral is clear. The tears shed over Footsie's lackluster performance miss the point. Relative to US markets (and many others too), the Footsie and FTSE All-Share indices are cheap.
If you're looking for bargains, you're more likely to find them in London than New York.
