Analysis: Is it time to move out of the US stock market?

The US stock market has been a lucrative investment for many in the past decade, but there are growing concerns about its high valuations and reliance on a few mega tech companies. Additionally, the upcoming US presidential election is expected to bring political uncertainty and potential market volatility. As trading volume in options linked to the Vix volatility index reaches record levels, investors are questioning whether it's time to look elsewhere. This article examines the arguments for and against staying invested in the US stock market.

The US stock market is the dominant force in global equities, comprising about 70% of the MSCI World index. However, the current performance of the US market is heavily dependent on a small number of companies, with the 10 largest firms in the S&P 500 making up 34% of the index. These stocks trade at high valuations, and their continued success is crucial for the overall market. The concentration of power in these tech giants raises concerns about regulatory threats and potential market instability.

The high valuations of tech stocks are partly due to their market positions and ability to command premium prices. However, these companies also face increasing scrutiny from regulators. The EU has named several tech giants as "digital gatekeepers" subject to new regulations, while the US Federal Trade Commission has filed an antitrust suit against Amazon. The bipartisan criticism of tech companies adds to the regulatory risks they face.

In addition to regulatory threats, short-term fluctuations in the US stock market are influenced by the actions of the Federal Reserve. As the central bank raises interest rates to combat inflation, there are concerns that the lagged effect of rate increases could push the US economy into recession. The inverted yield curve, where short-term yields exceed long-term yields, has historically preceded US recessions. Some economists predict a recession in 2024, which would create a challenging backdrop for US stocks.

The upcoming US presidential election adds another layer of uncertainty for investors. The political system has become increasingly dysfunctional and confrontational, and the aftermath of the last election was marked by chaos and violence. The potential for further unrest is high, especially if the election results are disputed. Moreover, the policies and views of the candidates, particularly regarding trade and technology companies, could have significant implications for international markets.

As the US stock market continues to face regulatory, political, and economic risks, investors are left with a dilemma. Neglecting the US market would create an imbalanced portfolio with limited exposure to technology stocks and a higher exposure to other markets with their own challenges. Furthermore, the US economy has a significant impact on global markets, and any downturn or turmoil in the US would have ripple effects worldwide.

While there are concerns about valuations and potential market volatility, completely avoiding the US stock market is not feasible for equity investors. However, given the risks, investors may consider allocating more of their portfolios to bonds and cash, which offer higher rates of return compared to equities. Diversification and a cautious approach can help navigate the uncertainties surrounding the US stock market and potentially mitigate risk.