American exceptionalism is real—in the stock market

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The full conception of “American exceptionalism” is controversial. Used by some awesome parties to beforehand their agendas of nan moment, nan belief that there’s thing chopped and unsocial astir America has been coming for hundreds of years. It’s been co-opted by some boosters and detractors to explicate distant countless features of nan U.S. landscape—from our precocious rates of weapon unit and abnormal wellness attraction costs to our disdain for authority and penchant for self-reliance

But while American exceptionalism whitethorn aliases whitethorn not beryllium existent successful nan governmental realm, it’s been beforehand and halfway successful nan singular capacity of nan U.S. system and banal marketplace complete nan past fewer years. And almost cipher saw this exceptionalism coming.

The United States’ post-COVID rebound thoroughly amazed experts crossed nan nation. Consult nan economics textbooks, and nan mixed unit of nan worst inflationary wave since nan 1980s and quickly rising liking rates should person near nan American system looking worse for wear. Tack connected 2 overseas wars that person crimped proviso chains and boosted power prices, and it makes consciousness why a U.S. recession was nan near-unanimous anticipation of galore economists and Wall Street leaders for years.

Still, contempt each these large wind clouds, it looks for illustration American consumers and businesses person truthful acold defied nan odds. The system continues to grow, pinch a resilient labour marketplace underpinning its mostly unexpected success. And while superior costs of surviving issues remain, nan U.S.’s post-COVID rebound has been peculiarly beardown erstwhile compared to its developed peers. 

In nan 4th fourth of 2023, U.S. GDP grew astatine an yearly complaint of 3.3%, compared to conscionable 0.1% for nan 20 nations that dress up nan Euro Area, and 1.1% for Japan. And for each of 2023, U.S. GDP roseate 2.5%, much than immoderate different G7 economy, according to nan International Monetary Fund’s (IMF) World Economic Outlook

The economical spot has helped U.S. stocks trounce their developed marketplace peers since nan outbreak of COVID successful early 2020. The S&P 500 is up complete 53% since Jan. 2020, compared to a 16% emergence for nan STOXX Europe 600 index, a 52% jump for Japan’s Nikkei 225 (non-cap weighted), and a 23% driblet for China’s CSI 300 index.

There are a fewer cardinal reasons why nan U.S. system has outperformed successful nan post-COVID era, from nan country’s comparative power independency to its fierce fiscal and monetary consequence to nan pandemic. They’re advantages that could thief American stocks support their exceptional tally of capacity complete nan adjacent fewer years.

“The U.S. is still successful a amended position than astir different countries correct now,” James Solloway, main marketplace strategist and elder portfolio head astatine SEI Investments, told Fortune. “We're seeing supra mean growth, which is somewhat surprising, but nonetheless, it's happening. So we’ve entered 2024 pinch a spot of momentum.”

That being said, unpredictable risks, from nan result of home elections to nan effect of overseas wars, could still rear their head. And aft U.S. stocks’ large run-up complete nan past fewer years, valuations are high. For investors, that intends going each successful connected different era of U.S. banal marketplace power whitethorn not beryllium nan champion choice, moreover if nan U.S. system is group to outperform its developed peers. In this era of uncertainty, keeping each your eggs successful 1 handbasket could beryllium risky.

“I deliberation that astatine this point, it pays to beryllium diversified,” Solloway said. “The United States has had a awesome run, chiefly owing to nan maturation quality of nan banal markets here, but valuations person go rather stretched comparative to different countries.”

Still, nan U.S. whitethorn stay nan world economy’s outlier successful 2024—in a bully way. And knowing why tin thief investors determine which measurement to spell next, and really agelong this era of outperformance could spell on.

A large fiscal response 

When nan outbreak of COVID-19 unopen down nan world system successful early 2020, nan governments of developed nations took very different approaches to supporting their home economies. The U.S. national authorities was by acold nan astir fierce pinch spending, dishing retired $4.6 trillion, aliases astir 10% of U.S. GDP successful 2020 and 2021, done six COVID-19 alleviation laws.

SEI’s Solloway noted that not only did nan U.S. person nan largest fiscal consequence to nan pandemic comparative to nan size of its economy, its COVID alleviation spending was besides “much much direct, putting money into people's pockets and supporting businesses directly, arsenic opposed to conscionable providing indebtedness guarantees.”

This forceful fiscal consequence whitethorn person boosted inflation, Solloway said, but it besides helped galore Americans support their incomes during a play erstwhile spending was people lower. The operation of comparatively unchangeable incomes and little spending helped consumers build up alleged “excess savings” during nan pandemic. By August 2021, Americans had over $2 trillion successful excess savings, and those savings helped buoy user spending and forestall a recession.

Resilience to rising liking rates

On nan monetary broadside of things, nan U.S. Federal Reserve was besides very fierce successful cutting liking rates to near-zero erstwhile nan pandemic hit. American consumers and businesses were speedy to return advantage of nan little borrowing costs, refinancing mortgages and different loans while rates were historically low. That’s helped them retrieve from nan little COVID-induced downturn faster than anticipated, and support immoderate spending powerfulness moreover arsenic liking rates person risen.

“Households and businesses some had immoderate insulation from nan summation successful rates… because some refinanced astatine very debased liking rates,” Solloway said. “And truthful they person not instantly felt nan effect of higher rates yet, arsenic opposed to a batch of different countries.”

When cardinal banks hike liking rates, it raises borrowing costs for each businesses and consumers—and that’s existent successful each country. But really quickly and severely higher borrowing costs impact consumers and businesses isn’t nan same—a truth connected show complete nan past fewer years pinch nan U.S. Federal Reserve, nan Bank of England, and nan European Central Bank each raising rates.

Take housing. In nan U.S., 79% of each mortgages had fixed rates of 30 aliases 15 years successful 2023, according to Bankrate. Conversely, successful nan U.K., 74% of mortgages presently person liking rates that are fixed for 2 to 5 years earlier they request to beryllium re-financed, according to data from nan U.K.’s Financial Conduct Authority.

As a result, 55% of U.K. mortgages saw their liking complaint summation since nan extremity of 2021, nan Guardianreported successful December. But successful nan U.S., astir 90% of homeowners still person owe rates nether 6%, moreover arsenic mean 30-year owe rates spiked to 8% past twelvemonth earlier falling to astir 7%, Redfin data shows.

For galore U.S. homeowners, it’s only erstwhile “their business changes, they person a family, they request to move to a bigger location that they commencement emotion nan effect of higher liking rates,” Solloway explained.

Energy independence

The U.S.’s comparative power independency compared to its developed federation peers is different logic it managed to outperform complete nan past fewer years.

U.S. earthy state accumulation has soared successful nan past 5 years, hitting a record high successful 2023. When Russia invaded Ukraine successful February 2022, that meant nan U.S. system was much insulated from rising earthy state prices than galore of its developed peers. European nationalist state prices, which are highly reliant connected Russian gas, peaked astatine complete over $70 per cardinal British Thermal Units (BTU) successful August 2022, compared to a highest of conscionable $10 per cardinal BTU successful nan U.S. 

The U.S. power manufacture has besides developed a ascendant position successful nan liquefied earthy state (LNG) marketplace successful caller years, pinch Europe progressively relying connected nan U.S.’s LNG. Innes McFee, main world economist astatine Oxford Economics, explained that Europe’s deficiency of power independency “puts European manufacture astatine a structural disadvantage versus U.S. counterparts.”

On apical of that, though nan U.S. system was affected by rising lipid prices aft nan commencement of nan Ukraine war, President Biden’s merchandise of 180 cardinal barrels of lipid from nan strategical petroleum reserve helped blunt nan impact. U.S. power companies were besides capable to rake successful record profits arsenic their accumulation soared. That helped boost U.S. firm net and banal prices, while providing high-paying jobs for galore Americans. 

U.S. lipid accumulation deed a record high successful 2023 arsenic well, and nan U.S. Energy Information Agency expects “improved good productivity” will lead to 2 much grounds accumulation years successful 2024 and 2025. That should thief forestall different lipid value spike that could exacerbate inflation.

Will nan U.S. proceed to outperform?

The factors described supra are conscionable a fewer of nan galore that experts connection to explicate nan U.S. economies’ post-COVID outperformance. Other economists constituent to nan U.S.’s much developed superior markets, saying they alteration U.S. businesses to readily entree rate successful reliable times, and person helped employers bent onto workers. Still much opportunity U.S. tech power has made nan American system and banal marketplace nan awesome beneficiary of nan AI boom. And others statement that nan nonstop support for American consumers successful nan shape of stimulus checks led to a wave of new business formation and nan upskilling of workers successful nan U.S. during nan COVID era, which has worked to summation productivity and economical maturation ever since. All of this doesn’t moreover touch connected nan home economical problems that different developed nations are facing—particularly China, pinch its ailing lodging market.

Bank of America Research, whose ain economists predicted a recession only to beryllium happily surprised by nan U.S. economy’s beardown performance, person different thought astir what could beryllium driving nan U.S. banal market: investors’ “FOMO.” The Global Equity Derivatives Research team, led by Benjamin Bowler, wrote successful its 2024 outlook that “fear of missing out” was “winning nan warfare successful investors’ minds” complete nan galore worldly basal and argumentation risks adding to larger macro uncertainty. 

The “FOMO” word is simply a millennial standby, invented successful 2004 by a Harvard Business School student penning an opinion piece successful nan schoolhouse magazine. But nan sentiment recalls akin euphemisms for investor enthusiasm from decades before: “irrational exuberance” was Fed chair Alan Greenspan’s parlance successful nan 1990s, and “animal spirits” was nan preferred explanation from legendary economist John Maynard Keynes successful nan 1930s. Too overmuch of this benignant of point tin create bubbles that abruptly burst, conscionable arsenic it did during nan dotcom bust, finishing disconnected nan Greenspan-era irrational exuberance. 

The existent question, however, remains: tin nan U.S.’ tally of bully shape last? Some of nan drivers of nan existent spot are besides imaginable liabilities. Dependence connected tech monopolies and shortage spending could trigger a achy correction. Similarly, fading excess savings and nan precocious costs of surviving could dampen user confidence, stifling growth. But according to Oxford Economics’ McFee, “the outlook for nan U.S. is really still beautiful bully comparative to different peers successful developed markets.”

McFee forecasts 2.5% existent income maturation successful nan U.S. this year, which should thief support user spending, compared to conscionable 1% successful Europe. He besides expects fiscal argumentation to beryllium “much much supportive” successful nan U.S. than successful Europe, wherever nan inclination is toward “consolidation and reining successful fund deficits.”

“The proviso broadside of nan U.S. system looks a spot stronger. And you've seen really beardown productivity maturation successful nan U.S. this year— that's not really nan lawsuit elsewhere,” he added. To his point, IMF economists are forecasting 2.1% GDP maturation for nan U.S. system successful 2024, much than immoderate different G7 economy.

All of that being said, McFee warned that nan statesmanlike predetermination twelvemonth creates 1 “big question” that will beryllium cardinal to determining nan economy’s future.

“What will argumentation look for illustration aft nan election?” he asked. “We've sewage nan Trump taxation cuts expiring adjacent year. So there's a really large opportunity to style taxation argumentation successful nan adjacent administration. And I deliberation that will person a large power connected whether aliases not nan U.S. tin proceed to outperform different developed markets.”

SEI’s Solloway agreed that nan predetermination creates a batch of “uncertainty” successful 2024, but added that nan U.S. system has different characteristic that should thief it thrive nary matter who is successful office. “You know, nan U.S. system and investors adapt, moreover successful harrowing times,” he noted. “We’ve really seen a very bully economy, and we've seen a very bully banal market, during immoderate very trying times complete nan past decade-plus.”

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