Matthew Lynn
The rest of the world is catching up with the US
It was a fitting end to the year. As trading ambled to a close on Wall Street in the quiet few days between Christmas and New Year the technology-heavy Nasdaq finally punched through the psychological 9,000 barrier. At the same time, the S&P 500 and the Dow were all hitting fresh highs throughout the month and may well break through another one before the champagne corks start popping on New Year’s Eve. A strong December for equities has capped a great decade for investors, with a record-breaking bull run reaching new peaks.
There is one important caveat, however. You had to be either American or heavily invested in American stocks to benefit. We already know there has been an incredibly strong bull market over the last decade. It is less widely appreciated how completely dominated by the US that has been. The rest of the world has not done nearly as well. Yet in the 2020s that is not likely to be true. The American market might or might not collapse one day – but the rest of the world will certainly start to catch up.
Of all the main indices, the Nasdaq has been on the most eye-catching run. It is up by a massive 11,128pc since it was launched in 1971 for an average gain of 10.1pc a year. It is up by 36pc this year alone. The broader-based S&P 500 is up by 28pc so far this year. Taking the decade as a whole, equities have been on a roll, with the bull market turning into one of the longest if not quite the strongest since records began. Despite relatively tepid growth, little sign of productivity rising, stagnant real wages and looming trade wars, shareholders have done incredibly well out of the 2010s.
But figures from Bespoke Research make it clear just how heavily skewed to the US the bull market has become. Just look at a few of the statistics.
From the 2007 peak prior to the financial crisis the S&P 500 is up by 164pc, so even if you had put money into the market right before the collapse you would still have made a lot of money.
By contrast, the Rest of the World index (made up of all the major indices outside the US ) is up by a relatively meagre 16.5pc over the same period. Measured since the start of this decade, the S&P 500 has risen by 262pc. But the Rest of the World index is up by only 62pc in the same 10 years – two hundred percentage points behind.
If you were unlucky enough to have been invested in UK equities you would only have just about got beyond the 6,900 level the FTSE 100 was trading at in the summer of 2007 or indeed at the end of 1999. The only place to make any real money was in the main American markets. Nowhere else came close.
It is not hard to understand the reasons for that. The US recovered more quickly and more completely from the crash than did the rest of the world. The state bailed out the banks quickly and efficiently, the Federal Reserve was first off the mark in slashing interest rates to record lows, and then printing dollars by the billion to reflate demand.
Even better, at what looks to have been just the right moment, with all that printed money getting some traction, President Donald Trump unleashed a potent mixture of a massive fiscal boost in the form of tax cuts and a wave of supply-side reforms (the success of his often chaotic administration at cutting red tape is still little understood in the rest of the world but it has helped re-ignite an entrepreneurial culture that had started to be suffocated under red tape).
The result? Record levels of employment, rising wages and growth strong enough for some modest interest rate rises. Against that backdrop, coupled with low inflation and far-lower taxes, it is no great surprise that America ’s corporate giants have been making plenty of money.
Even more importantly, the decade has been dominated by technology. The likes of Facebook, Amazon, Apple, Alphabet, Netflix and Microsoft have
‘The US recovery will run out of steam. It is already a little wobbly with idiotic tariffs hitting demand’
created whole new industries and turned themselves into some of the biggest companies in the world in the process (Netflix is the best-performing equity on the best-performing index, up by 3,767pc over the last decade – a story just as compelling as any of its shows).
With a few exceptions such as Spotify in Stockholm and some fintech companies in London, technology is an exclusively American industry. All the wealth it generates is delivered to the US markets.
For investors, however, the important point is surely this. After a great decade, American dominance is unlikely to last. Why? Two reasons: the US recovery will run out of steam eventually. Indeed, it is already starting to look a little wobbly, with President Trump’s fiscal boost running out of energy, and his idiotic tariffs starting to hit demand.
Meanwhile, technology is not likely to remain as dominant as it has been over the last decade, and companies from other countries will start to catch up. Very few countries dominate a global industry forever, and tech is unlikely to prove the exception.
US dominance of the global stock market is not a given. In the 2000s, for example, the Rest of the World outperformed the US (over those 10 years, the Rest of the World delivered total returns of 31pc compared with minus 9pc for the S&P 500).
The same will be true in the 2020s. Whether the US market collapses or not remains to be seen. But the rest of the world – especially the woefully underperforming UK – will certainly catch up.
By the time 2030 rolls around the relative performance numbers are going to look very different.