Last week history was made as two stock markets indices, the S&P 500 (INDEXSP: INX) in the United States and the FTSE 100 (INDEXFTSE: UKX) in the United Kingdom, set record highs. The S&P 500 reached an all-time intraday high of 2,188.45 and an all-time closing high of 2,185.79. The FTSE 100 hit a 52-week high of 6,931.04 on Friday, August 12. While shareholders in both countries are justifiably euphoric from the historic gains, investors have much to consider going forward.
After about a week of heart-dropping losses and frenzied selling in the wake of the UK's vote to Brexit, or leave the European Union, British investors have largely ignored the decision and buoyed their stock market to near an all-time high. One factor might be a shift from technical to fundamental analysis-after the initial shock and selloff, most investors realized that British companies remained sound. According to CNBC's "Brexit investing," though Brexit will hurt some sectors such as finance, consumer discretionary, and technology, other sectors such as utilities, telecommunication, and real estate investment trusts, will be helped. Also, the Bank of England's August 4 decision to cut interest rates to 0.25 percent-a record low-and announce extra stimulus measures attracted investors to British stocks. Finally, as world markets generally follow Wall Street and the UK is one of the biggest trading partners of the US, the UK is benefiting from the economic success of the US.
The US stock market is enjoying success because the US economy is doing great, and statistics show that. The August 5 jobs report stated that 255,000 new jobs were added in July, surpassing expectations. Retail earnings have also been good this year. The strong labor data means the chances of a rate hike by the Federal Reserve in September or late 2016 are increasing, helping banks and financial stocks. In addition, higher-beta investments like tech stocks are also rising, many from bear market or correction territory. Although crude oil is trading sideways, the gains from financials, tech, and others have more than offset that. Finally, the US market has done well since 1960 in election years except 2008, posting an average return of 9.1 percent.
The historic results do put investors in a dilemma. Can American and British stocks keep growing earnings to justify higher prices? Should they stick with US and UK stocks or switch to cheaper foreign stocks or alternative asset classes? Comparatively, Germany's DAX (INDEXDB: DAX) is down over 6 percent from its 52-week high, Japan's Nikkei 225 (INDEXNIKKEI: NI225) remains in correction territory down around 18 percent, and China's Shanghai Composite (SHA: 000001) still struggles at down almost 25 percent. In addition, precious metals and US bonds have retreated during the rise in stocks. In conclusion, it seems that the US and UK markets have more room to go down than up in the near future, and so savvy investors would consider foreign markets and bonds. If not, then they should avoid index funds or ETFs and buy the few value stocks available-quality companies temporarily abandoned by a market frothy with making history.
The author does not hold any positions in any of the stocks above.
