US Stock Market

Whenever we talk about the US stock market, we usually think of the New York Stock Exchange (NYSE) and the NASDAQ (NDAQ).

And that’s understandable. After all, the NYSE and the NASDAQ account not just for the bulk of share trading in the US, but also the world.

But the NASDAQ and NYSE are only two of 24 exchanges in the US, all with subtle differences and purposes.

Let’s examine the key characteristics of the US share market and why it is so widely followed by investors worldwide.

US Share market

While the term ‘US stock market’ implies a monolithic reference point, the US boasts more stock exchanges than just the most prominent pair — NYSE and the NASDAQ.

The US Securities and Exchange Commission (SEC) has 24 US securities exchanges registered with it, highlighting just how large and diverse the capital market is in the US.

How much is the US stock market worth as a whole?

As of June 2021, the total US stock market was worth a staggering US$45.1 trillion.

For reference, the US GDP at the same time was worth US$22.1 trillion.

Why is the US stock market important?

The US stock market is home to some of the world’s largest and most influential companies like Amazon, Google, Apple, Facebook, and Microsoft.

Moves on the US stock market can act as signals or indicators for markets elsewhere.

That’s unsurprising when you consider that the US accounts for more than a third of global stock market capitalisation.

For instance, a tech sell-off on the NASDAQ can lead investors to sell their tech shares on the ASX.

Indeed, a sharp NASDAQ sell-off in March 2021 was followed by a sharp sell-off for ASX tech stocks like Afterpay Ltd [ASX:APT].

While the stock market should not be synonymous with the wider economy, it is nevertheless an important subpart.

And the US economy casts a vast shadow. It is the world’s single-largest economy, accounting for almost a quarter of global GDP.

It’s also the most important export destination for a fifth of countries around the world, with the US dollar the most widely used currency in global trade and financial transactions.

Importantly, US bond and equity markets are the largest and most liquid in the world, making US monetary policy and investor confidence important drivers of global financial conditions.

Therefore, shocks to the US stock market could signal wider shocks to the US economy, which can ripple out to other markets.

Conversely, rises in the US stock market could indicate an improving US economy, which itself could suggest positive flow-on effects for other economies and markets.

There are even empirical studies suggesting a ‘sustained 10% increase in US stock market volatility (specifically, the VIX) could, after one year, reduce investment growth in the US by about 0.6 of a percentage point, in other advanced economies by around 0.5 of a percentage point, and in emerging market and developing economies by 0.6 of a percentage point.

So, the US stock market is looked upon as a global bellwether.

For instance, both the 2000–02 and 2008–09 global recessions originated in the US market.

And the 2003–07 global economic expansion was kick-started by a huge rally on Wall Street in March 2003.

Dow futures

You can use futures contracts to trade or invest in the Dow Jones Industrial Average (DIJA).

The Dow is often regarded as the most iconic stock index in the world. It tracks 30 blue chip US stocks spanning over nine sectors.

Dow index futures are popular financial instruments for getting broad exposure to US equities.

US stock market news

Since the US stock market is the financial centre of the world, you’d be hard-pressed not to come across news about it.

The real difficulty is sifting and curating the newsfeed.

If you want brief overviews of general market moves on Wall Street and how they can impact the ASX, you can check the Australian Financial Review and Sydney Morning Herald’s daily live morning market coverage.

These publications have designated pages for live market updates, including important details from the US.

If you want more detailed coverage, you can consult the premier financial US publications like the Wall Street Journal, Bloomberg, and Barron’s.

CNBC is also good for live coverage and US share market data.

Is the US stock market open today?

Regular trading hours for the US stock market including the NYSE and NASDAQ, are 9.30am to 4:00pm AEST.

For Australian investors, Market Index, an online publisher of Australian stock market information, tracks live global market trading hours on its site.

Is the US stock market overvalued?

Tech stocks are a big presence in the US stock market. For instance, in 2020, US tech stocks alone became more valuable by market cap  than the entire European market.

We also know that tech stocks tend to have higher valuations than non-tech stocks.

Tech firms, as valuation guru Aswath Damodaran said , command much higher multiples of earnings and revenues than other firms, the difference usually attributed to their higher growth potential.

So, it follows that a market with the biggest exposure to tech stocks will look overvalued compared to stock markets with less exposure.

That can give rise to calls of the US stock market ‘overheating’ or being overvalued.

Certainly, there have been instances in the past where swathes of overvalued US stocks led to bubbles, like the infamous dotcom bubble.

How does the US stock market compare to Australia?

One useful way to make the comparison is to use Robert Shiller’s cyclically-adjusted price-to-earnings ratio (CAPE).

Shiller is a Yale economist who won the Nobel Prize in 2013. In 2000, he famously warned the US stock market had become a bubble when he published his well-known book Irrational Exuberance.

The CAPE ratio is calculated as the market price divided by the average of 10 years of earnings, adjusted for inflation.

It is often used to gauge whether a particular market is undervalued or overvalued by comparing its current market price to its historical track record.

At the start of 2021, the US had a CAPE ratio of 33.44. Australia had a CAPE ratio of 18.

According to the CAPE ratio, the most expensive stock markets (among the 25 largest economies measured by GDP) are in the US, India, and Japan.

In contrast, the most undervalued markets are found in Poland, Russia, and Turkey.

Why is the CAPE ratio high for the US share market?

One thing to consider is the expected earnings of US stocks are higher, meaning that investors are willing to pay more now for larger anticipated earnings later.

For instance, take the three largest stocks on the ASX: Commonwealth Bank of Australia [ASX:CBA], BHP Group Ltd [ASX:BHP], and CSL Ltd [ASX:CSL].

Their combined market capitalisation is $448.8 billion.

Their combined FY20 net profit was $19.7 billion.

The three largest stocks on the US stock market are Apple Inc [NASDAQ: AAPL], Microsoft Corp [NASDAQ: MSFT], and Amazon.com, Inc [NASDAQ: AMZN].

Their combined market capitalisation is US$6.2 trillion.

And their combined FY20 net income is US$123 billion.

Not only that, the combined FY20 total revenue of Apple, Microsoft, and Amazon comes to US$803 billion.

In other words, the total revenue of the largest three stocks in the US exceeds the total market cap of the three largest ASX stocks.

So the US market could look overvalued if looked from Australia’s perspective, but we have to keep in mind the sheer scale at which that market operates, and the higher valuation that size sometimes entails.

Another way many analysts approach the question of whether the US market is overvalued or not is by keeping an eye on the US total market cap relative to US GDP.

This ratio is also known as the Buffett Indicator, after the Oracle of Omaha once commented that the market cap-to-GDP ratio was ‘probably the best single measure of where valuations stand at any given moment.’

The stock market capitalisation-to-GDP ratio is used to evaluate whether an overall market is undervalued or overvalued compared to a historical average.

For the US stock market, the historical average is 86%, which means the US total market cap is historically worth 86% more than US GDP.

In July 2021, that ratio was 205%, with many analysts suggesting this indicates an overvalued market.

How does this compare to Australia?

The current ratio of total market cap over GDP for Australia is 120%, with a 20-year high of 154% and a 20-year low of 74%.

It should be noted that determining the ratio’s undervalued/overvalued thresholds has been hotly debated, given the ratio has trended higher over a long period of time.

For instance, according to data from the World Bank, the market cap-to-GDP ratio for the US was 153% in 2000, indicating an overvalued market.

Indeed, the US share market fell sharply after the dotcom bubble popped, corroborating the informative value of the ratio.

However, the ratio later rebounded and was hovering around 130% in 2003, suggesting the US market was trending towards being overvalued.

But the market went on to reach all-time highs over the next few years, suggesting the ratio isn’t an exhaustive and sufficient measure of whether a market is overvalued or not, but it’s a good place to start, nonetheless.

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