Since their low point on Christmas Eve a few weeks ago, U.S. stocks and foreign stocks have been on a solid rally:
The S&P 500, which the C Fund tracks, has recovered over 13% since its lows. The MSCI EAFE index, which the I Fund tracks, has recovered closer to 9% since its lows.
Both funds are still down considerably over the past year, especially the I fund which is still down double-digit percentages.
U.S. Market Forces
The government shutdown is now 4 weeks in, with 800,000 federal employees and an additional number of contractors not receiving pay. The longer this goes on, the more damaging it is expected to be for the economy. A million or so people without pay, delayed initial public offerings, delayed fishing licenses for commercial fishers, and countless other problems continue to grow.
On the other hand, the market rallied last week on news of progress between the United States and China for a trade deal, with Bloomberg reporting that China is willing to buy $1 trillion more goods than usual over the next five years to help shrink the U.S. trade deficit.
There are multiple factors involved in a potential trade deal, including the trade deficit, intellectual property rights, opening Chinese markets to foreign investors, and other aspects, but any sign of positive talks over the past several months have been met by stock rallies from optimistic investors.
Foreign Market Forces
The biggest news for the I Fund is the failed Brexit vote. For more information, the implications and current events surrounding the UK leaving the European Union were discussed in this previous FEDweek article: How the Shutdown Could Impact the Stock Market.
Last week, UK Prime Minister Theresa May brought the Brexit vote to the UK parliament and it was voted down with the largest margin ever in the House of Commons, according to The Independent. It lost by a margin of 230 votes, which beat the previous record of 166 votes set in 1924.
May’s position as Prime Minster survived a no-confidence vote thereafter, but it remains to be seen what the next steps are for Brexit negotiations. Possibilities include a “hard Brexit”, meaning Britain exiting the European Union with no deal, or a new general election, or a second referendum on Brexit, or a delay on Brexit, or further negotiations.
Despite this, the UK stock market is up over the past week. This is likely because a lot of bad news is already factored into their stock market, and consequently valuations are very low.
The price-to-earnings ratio on average for UK stocks is a little over 13, and their average dividend yield is close to 5%. This compares favorably to U.S. stocks that have an average price-to-earnings ratio of over 20 and an average dividend yield of just 2%.
The UK stock market may have a lot of uncertainties going forward, but everything is relative to price. Right now, for investors taking a long-term view, the average price of the UK stock market is potentially attractive by historical standards and compared to other international markets.