US stocks had their best month in 2021. But I prefer cheap UK shares!

Illustration of bull and bear

Happy Halloween! It’s been a decent month for UK shareholders, but it’s been a great one for owners of US stocks. Since 30 September, the UK’s FTSE 100 index has risen by 2.1%. But US stocks have just recorded their best month of the year.

US stocks leap in October

Owning US stocks over the past five years has been a big winner. Since October 2016, the US S&P 500 index has more than doubled, soaring by 120.9%. But the performance of the tech-heavy Nasdaq index is even more impressive. The Nasdaq has more than tripled over five years, rising 207.1%. Meanwhile, the sometimes unloved and overlooked FTSE 100 has climbed by a mere 8.1% over half a decade.

This outperformance by US stocks is also apparent over shorter periods. Over one year, the S&P 500 has leapt by 39.1%, while the Nasdaq has surged by 41.4%. The FTSE 100 has done pretty well here, rising by 28% over 12 months. Also, during October, the US market easily beat London once again. The Footsie is up 2.1% this month, while the S&P 500 jumped by 6.9% and the Nasdaq rose by 7.3%. This was the best monthly performance by both US market indices during 2021. Indeed, both indices ended Friday at record closing highs. And that’s despite the October curse that sometimes haunts markets.

Should I keep betting on America?

US stocks have skyrocketed since the lows of ‘Meltdown Monday’ (23 March 2020). At its 2020 bottom, the S&P 500 hit an intra-day low of 2,191.86 points. On Friday, it closed at 4,605.38 points. That’s a whopping gain of 2,413.52 points in just over 19 months. In other words, the main US market index has more than doubled (+110.1%) during the worst global pandemic in a century. This is the strongest and steepest rise in stocks in modern history. Hence, I worry that investor euphoria has driven this bull market too far, too fast.

Then again, I always heed the wise words of mega-billionaire investment guru Warren Buffett, because “I don’t bet against America”. However, to me, US stocks are priced close to perfection, given their heady fundamentals. At present, the S&P 500 index trades on a price-to-earnings ratio of 29.3 and a lowly earnings yield of 3.4%. The dividend yield is just 1.3% a year. Meanwhile, the Nasdaq trades at 34.8 times earnings and offers an earnings yield of 2.9% and a dividend yield of a tiny 0.7% a year.

However, for many investors, TINA rules their decision to buy US stocks. TINA stands for There Is No Alternative (to buying shares), given the ua-low yields on offer from government/corporate bonds and cash deposits. But on most measures, the US stock market is strongly overvalued. So does it make sense for me to keep investing in America?

What’s my alternative?

History shows that buying highly-priced assets almost always leads to lower annual returns over the following decade. Hence, I’m very reluctant to keep pumping cash into steeply valued US stocks. Instead, my family’s future cash flows will be largely directed towards cheap UK shares. What I’m looking for are large companies with solid cash flows, profits and earnings. Also, as a veteran value investor, I love earning passive income from high-yielding dividend shares. And given my worries about the growing probability of a stock-market crash, I much prefer cheap FTSE 100 shares to most other global assets right now!

The post US stocks had their best month in 2021. But I prefer cheap UK shares! appeared first on The Motley Fool UK.

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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.