Major stock markets declined in September, ending the third quarter with mixed results. The Fed has indicated a future reduction in the COVID-related purchases of treasuries and mortgages in the months ahead. At quarter end, Congress had not agreed to lift the debt ceiling. Despite the domestic headlines, the U.S. stock market outperformed again in the quarter. Over the last 10 years the outperformance of the U.S. stock market is significant. According to MSCI, the US stock market increased 373% vs. 115% for the rest of the world. One cannot predict the next ten years, but many of the relative advantages for U.S. stocks remain in place versus international stocks. Several of these advantages are especially relevant in the current global environment, as follows:
Energy is broadly accessible in the U.S via low cost, abundant, and diverse supply sources. The U.S. has become the largest natural gas producer in the world and one of the largest exporters. European and Asian natural gas prices hit record highs recently, with short supplies as winter approaches. U.S. prices also moved higher, but trade at ~1/5th the price of those in Europe and Asia. The widening geographic price spread benefits U.S. natural gas exporters and gives U.S. manufacturers an advantage versus international competitors who face rising electricity and feedstock costs.
Corporate governance can vary widely by country. There are always exceptions, but U.S. stocks are among the most shareholder friendly in the world, with relatively reliable financial reporting. China’s crack down in 2021 has taken a toll on shareholders as it extends beyond anti-competitive regulations towards greater CCP influence in company operations (board seats, “common prosperity” initiative, etc.). Property developer China Evergrande, bearing over $300B in liabilities, recently hired restructuring advisors as the company struggles to meet interest payments in a potentially deflating housing bubble.
Technology – The U.S. large-cap stock market is comprised of a higher percentage of technology companies than most international markets. Many non-tech U.S. companies excel at applying technology in their respective industries. Of the top 100 global R&D spending public companies in 2020, nearly half were U.S.-headquartered.
COVID vaccines are likely to remain important for years to come. Many countries have closed the vaccination gap on the U.S. recently, with 45% of the world population having received at least 1 dose. However, some countries are still implementing strict lockdowns and/or facing challenges accessing high-efficacy vaccines. As new variants continue to emerge, access to boosters and the latest vaccine updates are likely to be crucial, and the U.S. is as well positioned as any country.
The market faced a variety of obstacles in the quarter, some now receding (Delta variant), some emerging. Despite these barriers, we remain confident U.S. stocks offer favorable prospects for the long-term investor.
-Jared J. Ruxer, MS