U.S. Stocks Still Look Better Than Anywhere Else

Outside the U.S., stock markets have never come close to regaining their highs from before the crisis, and they currently appear to be locked into yet another downswing. The MSCI ACWI ex USA Index, which, as its name indicates, covers all equity markets minus the U.S., has dropped more than 17% since its most recent peak early last year, when there was much excitement about a synchronized global economic recovery.

The disjunction between the U.S. and the rest of the world seems almost inexplicable. Globalization is now a fact of life. Consequently, tough times for Europe and Asia should create problems for American multinationals, and a comparatively booming U.S. should help multinationals in the rest of the world. So why, exactly, are markets reeling everywhere but in America, where they’re surging? Here are four different—though not mutually exclusive—explanations for what’s driving the divergence.

It’s the Economy, Stupid

The U.S. economy has logged a decade-long recovery, and although its fruits may not have been shared equally, what matters more to investors is that there’s been growth in the aggregate. Beyond American shores, it’s different.

In Europe, economic growth has been stifled by the sovereign debt crisis and the austerity measures many nations were forced to adopt either as a condition for bailouts or to reassure investors. Meanwhile, Japan continues to stagger along, unable to rid itself of a deflationary malaise that’s lasted three decades.

According to the International Monetary Fund, U.S. gross domestic product per capita has grown 31%, in constant dollar prices, since the beginning of the crisis in 2008, dwarfing Japan’s growth of 11% over the same period. In that time, the euro zone’s GDP rose by only 3%, and the U.K.’s contracted a disastrous 15%.

But stock markets do not follow only the latest numbers on economic growth. If they did, money would have surged from the U.S. to emerging-market dynamos such as China (up 154% over the same time) and India (up 89%). So the gap between the U.S. and the rest of the world is about more than economic growth.

The U.S. Dealt With the Crisis—Nobody Else Did

One big reason that stock markets the world over are underperforming the U.S. may be that those countries didn’t have their own Bernanke or Paulson or Geithner.

Ben Bernanke devoted his long academic career to working out how to stop debt crises from turning into economic depressions. Once at the helm of the Federal Reserve, he unleashed an aggressive response to the crisis, cutting rates to zero and expanding the money supply through purchases of U.S. Treasuries and other securities. Bernanke also worked with former U.S. Secretary of the Treasury Hank Paulson and his successor, Tim Geithner, to devise a series of stress tests that forced banks to reduce their leverage. The solution didn’t go as far as many believed necessary, but U.S. lenders emerged with comparatively stronger balance sheets than those of many of their peers abroad.

Across Europe, banks were far more bloated than their U.S. rivals entering the crisis, and many still carry a debt load that crimps their ability to lend and hampers their profitability. Shares of banks in the euro zone now trade for far less than the book of their equity, a sign that investors doubt they have their house in order. In Japan, banks have taken advantage of ultralow interest rates to ramp up lending to small and midsize businesses—even though a growing proportion are “zombies” that are unlikely to ever pay back their loans.

China, now the world’s second-biggest economy, relied on old-fashioned stimulus to get through the crisis. A huge splurge of debt-funded investment cushioned the blow to its economy, though the massive increase in leverage has left the country susceptible, many say, to a financial crisis of its own.

The ideas of Bernanke and his allies at the U.S. Treasury and the Federal Reserve Bank of New York were deeply controversial at the time. The U.S. may yet have a price to pay for them. But at this point, they’ve been the key for a decade of renewed gains in asset prices for Americans, and they averted the bear market that the rest of the world is suffering.

The FAANG Ate Our Growth

In a globalized world, it just so happens that all the companies that are eating everyone else’s profits happen to be listed in the U.S. The FAANG—originally coined for Facebook, Apple, Amazon.com, Netflix, and Google but nowadays often including Microsoft as well—has cleaned up by disrupting other businesses. No European or Japanese company is remotely comparable; and Alibaba, Baidu, Tencent, and other Chinese counterparts mostly concentrate on their home market.

Some of the statistics that provide evidence of the FAANG’s dominance are breathtaking. Much of Amazon’s stratospheric growth has come at the expense of existing retailers, for example. Over the past five years, its market has risen from $151 billion to more than $900 billion. (At one point in September, it exceeded $1 trillion.) All the other retailers in the developed world tracked by MSCI have seen their combined market grow from $1 trillion to $1.2 trillion in that same period.

All the companies that dominate the internet started in the U.S., which certainly tells us something about the dynamism of the American economy and the lack of innovation elsewhere. But there is far more to the rest of the world’s bear market than its lack of FAANGs. Over the past five years, the S&P 500 without Facebook, Apple, Amazon, Microsoft, Netflix, and Google has gained 34%, while the MSCI EAFE, an index covering the major developed markets outside North America, is down 7%.

A Bear Market Is Only Natural

History does not necessarily repeat itself, but it does rhyme, as the saying goes. And markets follow a clear historical pattern after a major speculative bust, such as the one we witnessed after Halloween in 2007. The three biggest examples over the last century were the Wall Street Crash of 1929, the crash of the Japanese market after its peak on New Year’s Eve 1989, and the dot-com bubble of 2000.

In all of those cases, a painful slide was followed by years of a sideways bear market. Stocks would gain for a while, buoying hopes, and then fall once again. A decade on from their respective crashes, the Dow Jones industrial average, the Nikkei 225, and the Nasdaq Composite all looked strikingly similar. They remained far below their peaks, which they had not regained even once.

That is the usual process of finding a level after stock prices have been driven totally away from any that makes sense. And it’s what many market watchers (including this one) predicted would happen after the 2008 meltdown: There would be money to be made along the way, but it would take more than a decade before benchmark indexes climbed back to their peaks. That’s exactly what’s happened—everywhere except the U.S.

This in turn raises this uncomfortable question: Did the U.S. really avert the usual fate that befalls countries after a major crisis, or has it merely postponed it?

©2019 Bloomberg L.P.