US super-dominance
It's been another massive 12 months for stock market returns, and Aussie household wealth has ripped to fresh heights highs this year, with housing prices, superannuation balances, and stock markets all arcing into a beautiful trifecta of record highs towards the end of 2024.
Total Aussie household wealth statistics are likely to reveal double-digits growth from a year ago, at around $17 trillion.
Remarkable stuff, all things considered!
The US S&P 500 has recorded another monster year of returns; it could end up delivering close to 30 per cent total return for the calendar year 2024.
It's hard to know what to think, exactly, but that seems like an exaggeration.
Certainly the US economy looks to be a far stronger potential engine of growth than heavily regulated and heavily taxed Europe right now, which seems to be signing suicide off notes on a range of policies.
How high?
The CAPE ratio or Shiller PE ratio has a number of potential limitations as a measurement of valuation for the US stock market.
For example, it arguably places too much emphasis on earnings from almost a decade ago, it's prone to missing changes in accounting practices, it takes insufficient account of the shift towards tech dominance over the past couple of decades...and so on.
All of the above having been said, a CAPE ratio of 38.8x is now once again levitating higher than anything seen outside of the tech bubble/bust at around the turn of the century.
You can look at a range of other measures, of course, by and large they tend to suggest the same thing.
The price to book ratio has exploded to above 5.3x, for example, and the price to sales ratio is also at an extreme high of around 3.2x.
US shares have been so strong for so long now, that buying the S&P 500 index has come to be seen as a no-brainer...to the extent that US stocks now account for about 63 per cent of the global market cap, up from around 60 per cent at the beginning of the year.
For context, the next biggest market is Japan at about 5½ per cent of global market cap (Japan being a once-roaring market which older readers might recall did something similar in 1989, albeit at just over 40 per cent of the global market cap).
(You might justifiably argue that China's market is bigger than that of Japan, if you include the full capitalisation of the market, rather than the free float. Fair enough.).
There's a lot of money and a lot of pension fund capital out there looking for returns these days, and the US stock market has simply been the place to go.
Positioning for 2025
All very interesting. The question is, what to do about it...if anything?
'Nothing much' is a valid answer.
You could argue, with some merit, that there are valid reasons for this massive US dominance, given how the big tech companies, with global revenues, tend to be listed in the US (i.e. follow the momentum).
Or you might argue that the US has become overcooked and there's better value elsewhere (i.e. mean reversion).
It's worth thinking about, not least because when US shares rise or fall, most other global markets tend to follow suit these days.
The market offered a big opportunity to go hard in early 2020, when there was a lockdown-driven but short-lived market panic, but if I'm honest with myself I made a bit of a hash of catching it successfully. I bought some properties instead. C'est la vie.
I'm just coming into a bit of a lump sum of cash or two next month, so hopefully I'll make a better fist of it next time around, whensoever may it come.
As for the next few years, it would be a fool's errand to forecast how Trump's Presidency might play out.
It could be an unprecedented period of economic prosperity, or it could be World War III. Or most likely somewhere in between the two extremes.
If there's one thing we can reliably predict about Trump, it's that he'll be unpredictable.
Strap in.
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