By James Mackintosh
Jan. 15, 2022
The U.S. is on a winning streak. Four years running, through political turmoil and Covid-19, American stock markets have beaten the world. As we hit the second anniversary of the pandemic, investors should be asking whether it can continue.
Broadly there are three ways to think about this U.S. market exceptionalism.
A superior economy
Lavish government subsidies meant household incomes rose as the economy slumped in early 2020, the first time they’ve ever gone up in a recession—and that positioned the U.S. to have among the best growth of any developed country since 2019. Economic growth fed profits, and that certainly explains some of the U.S. stock market’s outperformance.
Yet, higher profits account for only part of it. The rest is a rise in the valuation, anticipating faster profit growth in the future. Is that reasonable? Not if the economy merely returns to its previous path of growth. Not if the huge rise in government and corporate debt damps future expansion. And not if the economy is reliant on government stimulus for growth.
The greatest companies
Of the world’s pandemic winners, many were in the U.S. The biggest online-platform stocks—Alphabet, Microsoft, Apple, Amazon, Meta Platforms (formerly Facebook)—are American, and the pandemic accelerated their growth. In parallel to concern about coronavirus was concern about the environment, and the biggest winners of both are in the U.S.: Moderna and Pfizer due to highly profitable mRNA vaccines, and Tesla due to electric cars.
However, the U.S. hasn’t always been so exceptional. From 1950 to 2010, U.S. stocks returned 6.9% a year above inflation, including dividends, while the rest of the world returned 7.6%, according to market historians Elroy Dimson, Paul Marsh and Mike Staunton (compounded, that small difference becomes vast).
Rather than the greatest companies, the risk is that the U.S. simply has a market dominated by companies that benefit more from low interest rates. If a stronger economy leads to higher bond yields, U.S. stocks might suffer.
It’s all just speculation
The truly bearish approach is to say that all these attempts to search for a story about the past two years miss the real point, which was the rise in speculation. The important change was the arrival of millions of individuals flush with stimulus checks and with time on their hands to gamble.
I remain hopeful that the froth isn’t indicative of an irrational inflation of the entire market. I prefer to explain the U.S. lead with the first two reasons: the startling nature of its economic recovery and profits, combined with a big boost to valuations from lower bond yields.
As Covid retreats, so should U.S. exceptionalism, at least in the stock market.
Mr. Mackintosh is a senior markets columnist for The Wall Street Journal in London. Email: firstname.lastname@example.org.
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