What are the tangible and intangible factors that have contributed to long-term U.S. stock market outperformance compared to the rest of the world? Despite these advantages, why might we still want to continue to be globally diversified?
Show Notes
American productivity still leads the world—The Economist
The Outlook for Long-Term Economic Growth by Charles I. Jones—Federal Reserve Bank of Kansas City
Capitalism is in worse shape in Europe by Ruchir Sharma—The Financial Times
The Mother of All Bubbles by Ruchir Sharma—The Financial Times
The Curious Incident of the Elevated Profit Margins by James Montier—GMO
Federal Surplus or Deficit [-] as Percent of Gross Domestic Product – FRED
Euro area government deficit at 3.6% and EU at 3.5% of GDP—eurostat
Should investors just give up on stocks outside America?—The Economist
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Transcript
Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today is episode 503. It’s titled “U.S. Stocks Have Never Been This Overhyped.”
Stock Market Returns
Yesterday I pulled up our Asset Camp app–this is our stock and bond market index research tool–and I wanted to see the updated data and see what was the top-performing stock indexes in November for the 46 stock markets around the world we track. The top seven were U.S. stock indexes, including MidCap Growth, which was a leading performer. It gained over 12% last month.
If we compare U.S. stock returns overall–this would be representative by the S&P 500 index, the topic of episode 500 of Money for the Rest of Us–U.S. stocks returned 6.2% in November.
The rest of the world, excluding U.S, so the MSCI All-Country World Ex-U.S, fell 0.9% in U.S. dollar terms last month. The level of outperformance of the U.S. is astounding. Year-to-date, 28% return, compared to only 7.6% for All-Country World Ex-U.S, that includes emerging markets.
One year, U.S. stocks have outperformed non-U.S. by 20 percentage points, by almost eight percentage points over three years, by 10 percentage points over five years, eight percentage points over 10 years, and five percentage points over 20 years. Why in the world would we ever not put all of our stock investments in the U.S. stock market? Well, it turns out there are some reasons why, but doing so led to massive underperformance over the past decade.
If we go back to the end of the bear market in March 2009, an investment in an S&P 500 index fund or ETF would have returned 1,000%. You would have made 10 times your money investing in the S&P, whereas had you invested outside of the U.S, you would have only returned two and a half times your money, so a 270% return, compared to 1,000% return for the S&P 500. Investors in the U.S. are incredibly bullish, especially after the U.S. presidential election, with perhaps lower taxes, reduced regulations, tariffs that could benefit U.S. companies compared to the rest of the world.
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