“American exceptionalism” is a term that sums up the notion that the United States possesses strengths that set it apart from other countries. The concept has stuck around for more than a century and is somewhat controversial, especially as Americans struggle with deep political and other divides.
But there’s one area where American exceptionalism has stayed on full display for more than a decade: the stock market.
From the start of 2010 through 2022, an index of U.S. stocks tracked by researcher Morningstar gained 12% a year on average, trouncing the 4.4% annual results for a foreign-only index. U.S. stocks “have dominated their non-U.S. counterparts since the 2007-09 global financial crisis,” wrote researchers Andrew Daniels and Adam Sabban of Morningstar in a new study. A $10,000 stake in a diversified portfolio of U.S. stocks would have swelled to more than $43,000, compared to about $18,000 for the same amount invested internationally.
Moreover, American stocks are less risky, with less-pronounced price swings.
“The U.S. market achieved superior (investment) returns with lower volatility than those outside the U.S.,” the report continued. That defies textbook logic that says less-risky investments should generate lower returns.
Economic growth is higher in many foreign nations, especially developing ones like China, India and Brazil. Consequently, “You’d expect expect higher (investment) returns in those markets too,” said Daniels in an interview. But that’s not the case.
The impact of currency and innovation
Part of the superior results for U.S. stocks reflects a strong dollar. Simply put, a strong greenback undercuts foreign-stock returns from the vantage of U.S. investors, while a weak dollar has the opposite effect. The dollar gained about 33% over the 2010-2022 stretch, compared to a basket of foreign currencies.
But other factors also are evident, such as innovation among U.S. corporations, especially in technology and communications. Foreign markets have more exposure to financial services, commodities, manufacturing and other “old economy” industries and this has hurt them, the Morningstar authors contend. Banks, for example, have grappled with tighter regulation following the global financial crisis and, until recently, historically low interest rates that compressed their profits on loans.
As for innovation, the U.S. can point to “most of the world’s top universities, which attract top talent from within and abroad, and contribute to high levels of innovation and dynamism,” the Morningstar report said. “But great ideas can’t come to fruition without funding, and in that regard the U.S. offers entrepreneurs the best access to capital.”
Plus, a series of unfavorable developments have roiled foreign markets. Among them: Britain’s exit from the European Union, sovereign debt woes, slowing economic growth in China and Russia’s invasion of Ukraine. Such problems “have only made the U.S. seem more appealing,” the researchers wrote.
Common language and cultural bonds
They also pointed to geographic and cultural homogeneity, describing the U.S. as “a single market with 50 states and a common language.” The European Union has tried to replicate that, “but language and cultural and political barriers present major challenges,” as the bloc learned when the United Kingdom departed.
Nor have foreign companies kept pace with earnings growth here. U.S. corporations boosted their profitability by an average of 6.5% annually over the 2010-2022 stretch, beating the 5% annual gains for emerging markets such as China, India, Brazil and Russia and surpassing the paltry 1.7% average profit growth in developed nations, which include Japan, Britain, Germany, Canada and Australia.
“The bottom line is U.S. companies have had better fundamentals such as earnings growth,” the researchers wrote.
The case for better foreign performance
But are we at a turning point?
Foreign stocks appear more attractive in terms of valuations. Plus, there’s “reversion to the mean” — an investment concept that posits hot stocks and markets will tend to cool off, and eventually perform more in line with their long-run averages, while laggards will tend to pick up the pace.
At the end of 2022, U.S. stocks were more expensive, trading at an average 22.3 times earnings. That compared to a price/earnings ratio of 14.8 for stocks in developed foreign markets and 12 for those in emerging markets. That could give foreign stocks an edge going forward. So could higher dividend yields abroad. Such relationships remain in place, though the Morningstar researchers haven’t updated those numbers.
Fortunately, investors don’t need to choose between U.S. and foreign stocks. Mutual funds and exchange traded funds offer easy access to both areas. Some individual stocks do too, with many globally oriented American corporations having a lot of exposure to foreign economies, Daniels noted.
Morningstar’s Global Markets Index as of June held about 59% of its assets in U.S. stocks, 33% in developed foreign countries and 8% in emerging markets, providing a blueprint for where investors might want to spread their money.
The hazardous path of betting against the U.S.
The Morningstar study quoted from the letter written by legendary investor Warren Buffett in the 2023 annual report of Berkshire Hathaway, where he repeated his view that investors shouldn’t get too despondent over U.S. political rancor and other negatives that could taint their evaluation of the investment potential here.
“Despite our citizens’ penchant — almost enthusiasm — for self-criticism and self-doubt, I have yet to see a time when it made sense to make a long-term bet against America,” Buffett wrote.
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