The United States- Why the US is still a leader amongst markets?
The last twelve months in financial markets has reminded us that earnings trends for businesses generally follow central bank policy, as interest rates have gone higher, the outlook for companies’ earnings have gone lower, albeit with a lag of about eighteen months.
In an environment of volatility and uncertainty is there such a thing anymore as an investing ‘safe haven’? In my mind, the United States, despite its many challenges, remains the key exception, at least amongst larger and more liquid markets. Now I am not suggesting that US earnings trends won’t follow the global monetary cycle, but moreover, the US continues to provide qualities that investors look for when thinking about long term investing.
So, what qualities should such a ‘safe haven’ exhibit? Five come to mind, and the US ticks these boxes.
A large domestic market, with a limited degree of global integration. Across major economies, the US with its largely closed economy remains the best equipped to cope with global shocks.
Ample domestic resources (energy, hard and soft), which feeds into the point above. This ability to feed the population and power the economy satisfies this requirement. There is some argument that to a lesser extent Australia and Canada meet these criteria. However, Australia’s reliance on China to export hard commodities (iron ore amongst others) is well documented.
The depth, liquidity, and resilience of their domestic financial markets. Although there is a persistent debate about the end of the USD era, it remains the only viable global medium of exchange and store of value, with no other currencies (national or crypto) anywhere near close to eclipsing it. This does not mean it is not subject to periods of market downturns, but it remains the default currency in a ‘risk-off’ environment.
Relatively flexible labour and product markets. While state interference is rising everywhere, the US markets remain by far the most open and flexible.
Political and institutional stability. This may seem more contentious in a post Donald Trump era, with the country constantly looking on a verge of an upheaval. However, historically, it is one of the very few nations with a presidential system, backed by the house and senate process that supports both democracy and business.
The checklist of sorts explains my positive view of US assets over the long term. It is the only large secular (not just cyclical) market, with a leading edge across most industries and technologies. It also explains a persistent strength of USD, despite social and political challenges.
In a world of extremes, I would continue to seek the diversification benefit that US assets allow.