The US share market has been hitting new all-time highs over the past several months and the S&P ASX All Ordinaries Index (ASX: ^XAO) has struck some 52-week highs as well. When things go up for an extended period, the natural question to ask is: "How much farther can it go?"
There can always be a correction of 10%-15% or a short-term bear market of up to 30% that doesn't have to derail a secular bull market. Things get a little toppy and overheated and a sell-off relieves some of the pressure so that there won't be an even bigger blow-out later on.
In a recent article in The Australian Financial Review, Dominic Rossi, the global chief investment officer for Fidelity Worldwide Investment, an investment fund management company, stated that he believed the US share market could continue upwards for several more years.
The US may move back into a government surplus and business has more room to improve earnings there. He said that the mergers and acquisitions market is increasing and companies are investing more in capital expenditure – both signs of further business capacity expansion.
That may sound good if you are investing in the US market, but how does that help us here? Since the US still is a major driver for financial markets and world economic growth, a continued rise there is a good sign for All Ords. The peaks of the S&P 500 Index (NYSE: ^GSPC) are not exactly the same as the All Ords, but when the S&P 500 is trending up, usually the All Ords is also.
The periods of crashes are accompanied by the Australian market, as can be seen in the 20-year price comparison chart below.
Source: incrediblecharts.com
If Mr. Rossi is correct and the US domestic market has more room to run, then investors would want investments in rising cyclical stocks like consumer discretionary stocks. Such companies could be REA Group Limited (ASX: REA) for housing, Harvey Norman Holdings Limited (ASX: HVN) for household item and appliance retailing and Crown Resorts Ltd (ASX: CWN) or Flight Centre Travel Group Limited (ASX: FLT) for entertainment and leisure.
Foolish takeaway
The opportunities for higher share markets are there, but you still need to balance out the price you pay with the value you get. High PE stocks have to really deliver higher earnings or you may not get a satisfying return in the short-term.
