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Globe and Mail columnist David Berman.The Globe and Mail

Now what? That's the natural reaction after the Dow Jones industrial average surged above 20,000 for the first time on Wednesday and Canada's benchmark index flirted with a similarly impressive record high.

The natural answer: It's time to look for cheaper alternatives to North American stocks.

You can dismiss the Dow as an antiquated index that reflects the fortunes of just 30 U.S.-based companies.

Nonetheless, its remarkable gain over the past three months suggests rising optimism over the health of U.S. economy and corporate profits – at the same time as a number of observers point to swirling market uncertainty.

"Investor angst is high," David Kostin, the chief U.S. equity strategist at Goldman Sachs, said in a note last week.

Investment reporter, David Berman discusses what investors should know about the Dow's historic 20,000 mark and highs on the TSX

He added that the topic of policy uncertainty is being raised at every client meeting, and he characterizes the mindset of fund managers as "unsettled."

This might not be a bad state of mind when stocks are down and investors are worried that stocks could fall even more. This wall of worry helped drive U.S. stocks 240 per cent higher over the past eight years, as bearish arguments slowly crumbled.

But today, this isn't the case: The Dow and Canada's S&P/TSX composite index are not only at or near record highs, but valuations are stretched.

This suggests that a lot of good news – if you believe that border walls, draconian immigration policies, relaxed financial regulations and shredded trade agreements are good for the global economy – is built in to stock prices already, leaving the potential for disappointment should any of these policies backfire.

The Dow has a price-to-earnings ratio of 16.8, based on estimated profits (according to Bloomberg). That might look reasonable if there is no downturn in profits. But a number of other measures suggest that U.S. stocks are hardly a deal right now – at least relative to stocks elsewhere in the world.

Here's one valuation measure that is downright disturbing: Dow stocks trade at an average of two times their annual sales, and the corresponding figure for the broader S&P 500 isn't much different.

That's up – a lot – from 1.2-times sales in 2012. It's also close to its valuation in 1999, at the height of the technology bubble, and higher than it was in 2007, prior to the financial crisis.

Admittedly, Canada is also pricey, at 1.8-times sales. But European and emerging market stocks trade at an average of just 1.2-times sales.

The high price-to-sales ratios for U.S. stocks suggest that U.S. companies are expected to generate more profits with less revenues than their foreign counterparts. But profit margins tend to revert to normal levels, posing a potential hurdle for stock prices.

No, this isn't a forecast of doom-and-gloom. Even some fierce critics of Donald Trump acknowledge that his policies could provide a boost to U.S. economic growth – and, potentially, corporate profitability – in the near term. Also, buying and holding has its virtues.

But, clearly, the impressive bull market run for U.S. stocks – and, to a lesser extent, Canadian stocks – has left other markets, and even some other assets, looking more attractive.

European and emerging market stocks, neglected by investors over concerns about currency volatility, shifting U.S. monetary policy and weaker economic growth, deserve some attention.

Even U.S. Treasury bonds, beaten up because of expectations of rising inflation and interest rates, now look appealing: The iShares 20+ Year Treasury Bond Exchange Traded Fund (TLT-Q) has tumbled more than 17 per cent since July and now yields more than 3 per cent. In the event of a stock market downtown, bonds could perform well if investors rush to safety.

Full disclosure: I bought this bond ETF on Monday, and it is hurting me badly, as bonds continue to fall out of favour. But embracing something that no one wants can be profitable in the longer term – even if it's painful in the near term.

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