Double Whammy: US Stocks from a European Point of View

From 2011 through 2016 foreign investors gained from rising US equities and the rising dollar. Both have now reversed.

US equities from a foreign perspective looked very attractive, helped by a rising dollar.

When the dollar reversed, US equities only looked attractive if the rise in equity prices exceeded the fall in the dollar. That they easily did for a year.

S&P 500

Now What?

If you think I know you're crazy. No one else knows either.

But I can discuss the fundamental macro picture.

Fundamentals

  1. US equities are extremely overvalued by any rational measure
  2. Courtesy of zero fiscal control by Congress and Donald Trump, US deficits are spiraling out of control.
  3. In a vacuum, the dollar looks terrible

Regarding point number three, no one knows what crazy things other countries may do. And although concerns have dropped to near-zero that the Eurozone will break up, there is a far greater than zero chance Italy says to hell with it all. That could feed another euro crisis and a rush to the dollar, but equites are another matter.

Point number two will not vanish no matter what Europe does.

US equities have been enormously overvalued for years from any standpoint but that is especially true from a foreign standpoint right now.

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Mike "Mish" Shedlock

Nothing has fundamentally changed the prospects for Europe over the past year. The same wash of freshprint that has lifted the asset prices saps over here think makes America “wealthy,” has just eased immediate cashflow concerns in Europe as well.

Isis having retracted may have knocked the confidence of in-Europe rabble rousers down a few notches, keeping immediate Armageddon off of people’s minds.

But aside from that, the Southern periphery has gotten no more efficient. Nor have their governments gotten any closer to take that into account when deciding what to spend. Nor their banks any less willing to lend on the basis on no more than blind faith that the ECB will debase Germans to bail them out. Ergo, none of the imbalances that existed a year ago, has gotten any less imbalanced.

Trump winning in the US have given the Euro chattering classes, and the saps who give them the time of day, a common “enemy.” Which always helps a bit with unity. At least in the short run. As does the fear mongering over “Euro Trumps” seemingly popping up everywhere.

Still, the Euros continue to spend their children’s money at an alarming rate. And, unlike the Americans who can at least pretend there will be some Mormon kids left to toil in permanent destitution to eventually foot the bill, the Euros have no children. So, instead, they’re spending Muslim kids’ money. Implicitly assuming that ever growing hordes of muzzies will somehow be grateful for the opportunity to spend their lives as chattel labor, to pay off debts incurred by a bunch of Euro geezer overlords dumb enough to fall for something as trivially retarded as progressivism.

Stocks are overvalued, yes. But most of it is due to low interest rates. As long as rates stay low then the Present Value of future dividends for stocks stays high. That is where we are. I haven't seen this mentioned on this site in terms of the PV of the stock market. Rates moving from 5% to 2% is worth about an 80% gain in the S&P alone if you simply take the present value of projected dividends. Of course, if rates go back to 5% then the stock market reverses that gain.

The US stock market has a global problem. My view is that most of the Feds rate hike policy is being done to defend the dollar, and at what cost? Should they back out of the policy the floor will open beneath them. These are really dangerous times.