US markets hit record highs. Are US stocks overvalued and where is the market opportunity?
US markets reached all time highs in early to mid February, with the S&P 500 and the Nasdaq 100 indices hitting record highs on February 12, and the Dow Jones Industrial Average breaching 31,960 on February 24.
All three indices have corrected slightly since, but one question remains on many investors’ minds. Does the US market still have legs to run, or are US stocks overvalued now?
The key to this answer lies in the main cause for the recent rally.
Markets ride on optimism over Biden’s proposed stimulus package
US President Joe Biden has continued to push for a US$1.9 trillion stimulus package, to aid small businesses and unemployed Americans who have been adversely impacted by the Covid-19 pandemic.
The sheer quantum of the stimulus package has made market watchers very nervous about runaway inflation. Lawrence Summers, economic adviser to President Barack Obama, believed the stimulus could lead to unprecedented inflationary pressures “not seen in a generation”.
On the other hand, US Treasury Secretary Janet Yellen has come out in support for the package, noting that the economic downside from a scaled down package could be far worse than inflation.
Investors, however, are less concerned about inflation and more interested in the falling Covid-19 infection numbers in the US over the past month, as well as the positive impact the stimulus will have on the economy. In particular, the stimulus could provide an additional boost to technology stocks that have seen a greater adoption in the post Covid-19 economy.
Mooris Tjioe, investment analyst from Phillip Futures noted that technology stocks had hit all-time highs at the beginning of this year before the recent pullback. “During the most recent earnings season, we saw technology giants such as Amazon and Apple report record revenue numbers in excess of US$100 billion for the quarter, and I think that really underscores how well the sector has been doing as a whole during the pandemic.”
Sectors to watch
While US markets are at all-time highs, not all stocks are necessarily overvalued. “I think some sectors will be safer plays than others, although equities remain generally risky,” says Tjioe.
“Pandemic-era darlings have been feeling the heat recently, especially for overextended technology stocks. As an extreme example, let’s take a look at what’s been happening with electric vehicles.
“We could make the case that the rally in these sectors from November 2020 might have been overdone in the short-term, with companies like Nio and Tesla reaching their record highs at the beginning of 2021.
“Nio reached a valuation of around $100 billion – higher than Ford and General Motors combined – without ever turning a profit. While Nio may be a fast-growing company, it has not earned the right to such a valuation just yet.”
Instead, he recommends investors look at non-technology stocks and ESG related businesses.
“Over the past few months, many non-technology stocks have reported favourable earnings in spite of the pandemic,” says Tjioe. “With the Biden administration in charge, the earnings outlook continues to improve as vaccination rates pick up and pandemic management strategies start showing positive results. A cyclical rotation is starting to take hold, with minor rallies in airline, consumer discretionary, and bank stocks.”
“Environment, Social, and Governance (ESG) investing is also likely to be an enduring theme this year,” he continues. “The critical question before the pandemic was always – do you have to pay a premium when holding an ESG-themed portfolio?”
“I think the performance of ESG portfolios last year has debunked that myth entirely, and as a result I think investors can look forward to more ESG-themed products to be released this year, while more companies take their ESG commitments and branding a lot more seriously as well.”
Investing strategies for a post pandemic economy
How should investors invest? What strategies should you employ and what risk management measures should you have in place as you invest?
Tjioe reminds investors to practice due diligence when investing, ensure their portfolios are well diversified, and maintain healthy respect for a company’s earnings potential.
“The pandemic upended several valuation models as we saw various equities gain based on either their theoretical value proposition, or from being in a position to benefit from the pandemic, such as glove makers and test kit providers. Now we are starting to see a widespread sell-off in those equities because investors don’t believe that they can justify those valuations post-pandemic.”
“With nationwide immunisation programmes underway in most major economies, investors will need to start taking a closer look at the staying power of individual equities, starting with their earnings potential and future outlook.”
Investing platforms for a post pandemic economy
With market volatility expected to continue for the near term, investors could look for investment products that allow them to trade in both bull and bear markets, including CFDs and futures.
Investors who prefer to trade multiple asset classes can also consider a multi-asset platform such as the Phillip MetaTrader 5 (MT5) platform. Phillip MT5 offers an expanded range of asset classes including Forex, Gold, and Crude Oil, Indices and Shares CFDs. It is also integrated with Trading Central indicators and the powerful Autochartist pattern recognition tool.