Is Wall Street Too Expensive?

by | Sep 26, 2013

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taperingWall Street and America’s advantages may already have been priced in, says Brian Tora


If any market can be considered flavour of the month at present, it really has to be the United States of America. The S&P 500 Share Index has entered new all-time high territory this year, while our own benchmark – the FTSE 100 – continues to struggle at close to 10% off the 6,930 peak that it achieved nearly 14 years ago. Yet, by all accounts, Wall Street is the very market that managers in the UK seem to find it most difficult to get right.



According to Bestinvest’s “Spot the Dog” report, in which consistent underperformers are highlighted, the IMA North America sector had 21% of its funds in the doghouse – so to speak. That’s a greater percentage than any other sector – suggesting that the US is a tricky place in which to excel. But this year alone investors will have seen a strong market performance and currency gains to boot. Can the trend continue across the pond?


A Soaring Mood

On the face of it, the US looks to be a relatively safe option for those investors who are seeking equity growth. At a time when many emerging markets are facing a slowdown in previous record growth levels, and when Europe still in disarray after its sovereign debt crisis and when Japan is also struggling to restore its credibility in the face of excessive debt and adverse demographic trends, America must seem like a beacon of stability. The problem is that a strong Stateside market has rendered its shares less attractive. (Although to be fair, the US tends to trade at a premium to other developed markets.)



Let’s look at the actual numbers. US economic growth has resumed, albeit at a sluggish rate. The second quarter rise in GDP pipped the first quarter’s 1.1% at 1.7%, but it was hardly robust enough to warrant cracking open the Californian sparkling. Indeed, no less an investor than Warren Buffett remarked at his company’s AGM that what was really needed was growth of 2% or more.



But other signs also help to paint an improving picture. The US housing market has comprehensively turned the corner, delivering double digit growth in some areas over the past year. And aside from the feelgood-factor that this engenders, it is doing wonders for personal balance sheets, with many of those trapped in negative equity at last being restored to a positive position.


The Energy Advantage

Don’t forget the shale oil and gas revolution, either. It‘s estimated that upwards of 25,000 wells have been sunk in recent years, delivering these valuable fuel and energy resources through the fracking process. There has been nothing like the controversy that’s surrounded this technique here in the UK – but then, there is so much more land per head of population in America.



Make no mistake, this is a most important development for the US economy. Some estimates suggest that the country could become energy self-sufficient in as little as a decade, while others suggest that American reserves will overtake those of Saudi Arabia before too long. The critical edge that all this copious and relatively inexpensive energy can give to American business is one reason why investors have become more excited over the opportunities there.



And then there’s the labour issue. Thanks to the rising labour costs in those parts of the emerging world which have come to dominate manufacturing industry, we’ve been seeing a wave of ‘re-shoring’ – or the migration of basic jobs back onto US soil. Add to that the considerable intellectual capital that exists in American technology industries, and you can see why US shares have attracted the following they have.


Too Late to Catch the Train?

Far be it for me to pour cold water on to such a positive and enticing story, but the real time to jump aboard the American bandwagon was probably last year. While all these snippets of good news to add up to a case not to ignore the US, it doesn’t seem too likely that the present pace can be maintained.



Don’t forget, either, that although US banks have comprehensively restructured and now look far stronger than those in Europe, America itself does have a debt problem of almost unimaginable proportions, which will act as a drag for some time to come.


And finally, do remember the findings from Bestinvest. Looking at the IMA North America sector recently, I was struck at the wide variety of performance achieved and the difficulty in finding consistency amongst many of the leading management groups. The US should certainly not be ignored – but the higher its market travels, the greater the need for caution.


Brian Tora is an associate with investment managers, JM Finn & Co


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