A very interesting piece from the NYT about the slowdown in health care costs in the US. Seeing that all of the massive budget deficit projections revolve around out of control healthcare spending, this is a trend that is worth following. The implications could be large, as many have concluded that increased costs are going to cause consumers and businesses to contract spending in other areas just to pay for healthcare. If this trend continues this could be very bullish and may increase the outlook for the US economy. Here is the excerpt from the article:
In figures released last week, the Congressional Budget Office said it had erased hundreds of billions of dollars in projected spending on Medicare and Medicaid. The budget office now projects that spending on those two programs in 2020 will be about $200 billion, or 15 percent, less than it projected three years ago. New data also show overall health care spending growth continuing at the lowest rate in decades for a fourth consecutive year.
Health experts say they do not yet fully understand what is driving the lower spending trajectory. But there is a growing consensus that changes in how doctors and hospitals deliver health care — as opposed to merely a weak economy — are playing a role. Still, experts sharply disagree on where spending might be in future years, a question with major ramifications for the federal deficit, family budgets and the overall economy.
Here is a recent chart from Societe Generale looking at the cyclically adjusted P/E ratio (CAPE). This is the price of the stock market divided by an average of the earnings over the last 10 years. It is meant to smooth out the inevitable volatility in earnings. What we see is that the US is basically in-line with the average over the past 30+ years, while Europe is at some of the lowest levels since the early 1980s.
Greenspring has a neutral weighting here, but I think it warrants some additional research.
Source: Société Générale
After this nice rally, US stocks aren’t cheap, according to the popular CAPE valuation metric, which averages the last 10 years of earnings in the P/E ratio. As you might expect, many European and beaten down EM countries are undervalued historically speaking. This doesn’t mean that the rally will stop or the lower valued countries will start to outperform, just that there is added risk, since P/E expansion is less of a probability from here.
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