November was a terrific month for the US stock market, especially for shareholders of mega-cap tech companies. The S&P 500 leapt 8.9%, while the tech-heavy Nasdaq Composite surged by 10.7%. This was the indexes’ best month since July 2022.
With US stocks accounting for 65%+ of global market capitalisation, this pushed up the MSCI All-Country World index by 9%. This was the best monthly performance for global stocks since November 2020, when news of effective Covid-19 vaccines sent share prices soaring.
The STOXX Europe 600 jumped by 6.5% in November, while the Japanese TOPIX was slightly weaker, gaining 5.4% in the month. Bringing up the rear was the UK’s FTSE 100, delivering a rise of just 1.8%.
What’s changed recently?
The main reason for global share prices soaring since their 27 October lows is investor hope that the US Federal Reserve is close to winning its war against inflation.
With many pundits predicting the US rate-hiking cycle is over, futures markets are now pricing in rate cuts by mid-2024. This would relieve pressure on over-indebted governments, companies and consumers, potentially boosting economic growth.
Thus, the optimistic narrative now reads: if central banks get inflation under control, then interest rates can come down. And when rates start falling, the prices of risky assets — including shares — could rise. But there’s many a slip ‘twixt cup and lip, as the old saying goes…
The Footsie secretly beats the S&P 500
UK large-cap shares have lagged behind their US counterparts for years, even decades. For example, over five years, the S&P 500 is up 74.5%, excluding cash dividends. At the same time, the Footsie has risen just 11.1%.
However, remember that US stocks underwent a brutal bear market in 2022, with tech shares taking the heaviest hits. Meanwhile, the FTSE 100 escaped this market meltdown, rising by 0.9% in 2022 (excluding dividends).
Indeed, in the two years since 3 December 2021, the S&P has risen by 1.2%, while the Footsie has gained 5.7%. Hence, the UK index has actually beaten its US rival over the past 24 months — something I predicted, but may well come as a surprise to many pundits.
Is anything wrong with the UK market?
Lots of commentators and financial writers argue that the London market is in permanent decline. The number of companies listed in London keeps falling, while major businesses prefer to list on the racier US exchanges.
As a contrarian, I’d argue that there’s nothing intrinsically wrong with UK shares. With FTSE 100 firms earning around three-quarters of their earnings overseas, this isn’t really a British or even Brexit problem.
Furthermore, I know one very exciting thing about the London market: it’s close to being as cheap as it’s ever been. While US valuations look stretched to me, the Footsie trades on a modest multiple of around 11 times earnings, delivering an earnings yield of 9.1%.
In addition, the UK index offers a dividend yield of 4% a year, well ahead of other markets’ cash yields. And this is covered a healthy 2.3 times by earnings — a decent margin of safety. Therefore, I expect the UK stock market to produce solid — even pleasant — returns for me over the next five years!
