Is US market expensive?

In my previous blogs I have illustrated the phases of Economic cycle which are; Phase I - Initial Recovery and Phase II - Early Upswing. So let’s go to Phase III - Late Upswing. Watching Dow Jones going all time crossing 21000 mark brings a question in my mind "Is the US market expensive?" We will analyze the information before creating a view using the theory of market cycles and comparing it with Phase III - Late Upswing. In this phase the economy starts to get overheated, business confidence is at the top, unemployment falls, inflation starts increasing, both short term and long term rates tends to rise and stock prices are rising. This is the last phase before the economy goes into "Recession".

1)    Confidence and Employment:- Consumer and Business confidence in the US is at all time high, while unemployment is at all time low. Below mentioned data gives us some insight into the unemployment rate for the last 16 years, being the lowest in 2007 at 4.6% which went up to 9.6% in 2010 and again it went down to 4.7% in Feb 2017. Unemployment is around all time low in last 16 years which gives a clear indication that businesses are confident of growth, hiring people and building capacity.

 Data Source: - US Labour Department

2)     Inflation in increasing: - Data of Average inflation in USA mentioned below, shows that inflation  is increasing in USA which indicates that demand for good and services is increasing compared to supply. This shows consumer confidence is increasing as they are consuming more goods and services.

Data Source: - www.inflation.eu

3)  Central Bank limiting the growth of money supply: - Quantitative easing (QE) is a monetary policy in which a central bank creates new electronic money in order to buy government bonds or other financial assets to stimulate the economy. FED (Central Bank) in the US did quantitative easing to increase the monetary supply to bring a revival in the economy. Bond buying program was a means  to increase the liquidity so that people consume more goods and services.  In year October 2014 central bank ended its QE program to limit the money supply and control inflation.  

4)  Rising Short term rates: - QE was primarily done so that short term rates are kept low, but as inflation started picking up FED decided to increase the short term rates in the December 2016. The FED has also given an indication of rate hikes in future.

5)   Rising Bond yield:- Both the short term and long bonds saw a fall of interest rates during the period of QE, but post the rate hike in December 2016 both the short term and long term rates started moving up. The 10 year US govt paper is the most liquid counter so increase in the rate is clearly visible from the chart below.

6)    Rising stock prices with increased risk and volatility: -The US stock market has seen a spectacular ride as lot of stocks were listed and resulted into revival of the economy. From the bottom of 2009 of Lehman crises the Dow has multiplied 3.16 times. As per the Warren Buffet indicator of Market Cap to GDP ratio, the US economy currently has a Market Cap to GDP ratio of 1.3 times. A clear indication that it is a highly expensive market.

Source:- Google

It seems that the US market is in the last phase of the economic cycle, as all the indicators show the early signs of economy peaking out. The economy in this phase can last for 6 month to a year. 

Source:- Google

This reminds me of the famous Quote of Sir John Templeton "Bull markets are born in pessimism, grow on scepticism, mature on optimism and die on euphoria".As an investor, one needs to re-look into the strategy and find out pockets where reasonable risk adjusted returns can be made.