Following the latest meeting of the US Federal Reserve yesterday, US stocks shot higher once again. The Dow Jones jumped a hundred points to close at 36,157, with the NASDAQ up 161 points to finish the day at 15,811. Both are at record highs, posting new tops. As a UK investor, US stocks can offer me a good diversifier for my overall portfolio. But does it really make sense to buy given the current levels?
Getting my head around buying high
If I break things down, my main concern is that I’m buying stocks that could be overvalued. Not only this, but the concern is that buying something at the highest level ever doesn’t really make sense. I want to buy low and sell high, to maximise the potential profit from share price movements.
As humans, we like to feel like we’re getting a good deal, but buying expensive stocks might still give me one. In reality, US stocks have been making new highs for most of this year. For example, consider Tesla, a constituent within the NASDAQ. A year ago the stock was trading at all-time highs around $430. Yet the price today sits at $1,213. So just because something looks expensive doesn’t mean that the price can’t continue to push higher.
If I’m still not convinced in this area, then I can be selective in the stocks that I buy within the US markets. I’d steer clear of household names such as Microsoft (again at all-time highs), but I can find good companies that have more attractive valuation metrics. In fact, I’d much prefer to actively pick US stocks instead of simply buying a tracker that mimics the entire index.
The drivers behind US stocks pushing up
Another point I need to consider is why US stocks are making all-time highs, when an index like the FTSE 100 isn’t.
The latest spike came from the meeting by the US Federal Reserve. Although the bank is looking to reduce pandemic stimulus, it pushed back on expectations of an interest rate hike soon. It looks like the first hike could be this time next year. This is a positive for US stocks, as it means that financing and issuing new debt within the next year can be done at the current low rate.
On the other hand, the Bank of England is looking to raise interest rates either this month or next! So there’s a clear difference in the state of the economy and in the thinking by the two central banks.
US markets also contain the large tech companies. As mentioned above, Tesla is one example here. This industry has been the standout performer this year, with the majority of the big players being listed on the NASDAQ. Therefore, it’s natural that this market has seen high growth.
I completely get that it’s hard to justify investing in US stocks at all-time highs. Yet I would look to allocate a small proportion of my portfolio to the US. However, I’d specifically look to target firms that have low P/E ratios, to try and find value.
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jonathansmith1 has no position in any share mentioned. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Microsoft. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.