The lessons of equity markets don’t apply universally
It’s the US independence day holiday and this chart should give Americans more to cheer about than any other.
It shows equity returns since 1985 and the S&P 500 absolutely crushes every other major global index. The only one that’s even close is the MSCI World Index and that’s partly because it contains a heavy weighting in US equities.
Corporate America truly is the champion of the world.
Unfortunately, this chart also demonstrates how much of the ethos around equity investment is wrong. In the same way that Hollywood exports American culture and views, the performance of US equities has resulted in an export and extrapolation about the profitability of investing in stock markets for the long haul. Be careful about applying those to other markets, and of applying them to the future.
This truly may be a case of one-time American exceptionalism. Here are six reasons why I believe American markets have crushed those in the rest of the world:
1) Technological dominance
If you go back to late-2011 or into the mid-90s, there is less of a cap between the US and the world. Following both of those periods, tech was ascendant. If you strip out the contributions of internet and technology dominance, the US outperformance is greatly diminished.
That raises the obvious question about why the US is so dominant in technology? Some of it surely comes from scale and wealth. The US was the leader in the internet from the start and the enormous wealth of the US created a culture of investing into tech startups that has yielded remarkable dividends. Either that or the incredible sums the US government has invested in spying, surveillance and espionage has been used to pass foreign corporate secrets to US companies.
Globalization has been a one-time opportunity for US companies to new markets. It makes sense that the corporations in the most-competitive market in the world would be the winners when the whole world opens up. US companies also have access to the easiest financing conditions via the American bond market. Finally, the US government is by far the most powerful in the world and it has twisted and shaped the global landscape to suit its companies.
If you look at that same period, it’s characterized by falling US corporate taxes and rising indirect corporate subsidies. I think that explains some of the gap. At the same time, corporate rates have fallen elsewhere without nearly the same results so it’s all debatable but I think that’s at least part of the equation but it might not be forever if the deficit isn’t trimmed.
4) The role of the US dollar
Using the chart above, the out-performance of US equities is even more impressive in some ways. The dollar is up 28% against the pound in that period. Even with the 17% rise in the yen, the S&P 500 has still lapped the Nikkei 225 many times. More importantly, the US dollar’s roll as the medium of exchange globally make it easier for US companies to do business globally.
This is one that’s rarely mentioned but English as a language has been ascendant for generations but it’s accelerated in the past 30 years. In practice, this means that if a US company is trying to manage workers or plants abroad, it’s much easier than if a Japanese one were to do the same.
On the 4th of July you have to give a round of applause to the American entrepreneurial spirit. It is surely part of this equation. Americans are diverse but it’s a country that attracts dreamers and entrepreneurs from all over the world. Those are people who aren’t risk averse. It’s a country that’s in the headlines far too often for politics and not nearly enough for what it’s given the world in terms of business, culture and technology.