October 2, 2023

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Opinion: U.S. stocks will continue to beat the alternatives

Last week, the U.S. administered its 150 millionth dose of COVID-19 vaccine. As of Friday, more than 56 million Americans had been fully vaccinated, or roughly 17% of the population, and four million doses were given on Friday alone. The daily death count from COVID is the lowest since last March. At the current pace, most U.S. adults will be fully vaccinated by summer.

But Europe, which, like the U.S., handled the early days of COVID poorly, has managed the rollout of the vaccine even worse. European citizens are being vaccinated at less than half the rate Americans are, and a new wave of cases is hitting its shores. In France, where the virus is “spreading fast and it’s spreading everywhere,” President Emmanuel Macron last week declared a four-week lockdown.

Meanwhile, despite much hand-wringing about the lack of bipartisanship in Washington DC, a polarized Congress passed–and two presidents of opposite parties signed—$5.3 trillion in COVID relief and economic stimulus within the past year. The U.S. relief effort, at 27% of GDP, is bigger than what all of Europe has done.

That’s showing up in the economic projections, too. The Organization for Economic Cooperation and Development & Development (OECD) doubled its projections for U.S. GDP growth this year, to 6.7%, which would be the fastest GDP growth since 1984. Goldman Sachs expects it to grow by 8% and unemployment to reach 4% by the end of the year. The March jobs report, released last Friday, showed 916,000 new jobs were created last month, and the unemployment rate fell to 6%, though 8 million of the 22 million jobs lost to COVID still haven’t returned.

Read: Why the drop in the unemployment rate to 6% doesn’t mean very much

What this means is that the U.S. market is poised to outperform other major stock markets in the 2020s just as it did in the 2010s, while European and developed and emerging markets will continue to lag. You don’t even need to decide whether to buy growth or value, a fund tracking the S&P 500 index
or the Russell 2000
I believe buying the whole market is the best way to do it because you don’t have to outsmart the pros and you can profit from any rotations within the market itself.

I’m not waving the flag here or proclaiming American exceptionalism; we’ve screwed up a lot of things on COVID relief. And even as new variants spread like crazy in states like Michigan, too many childish chuckleheads are partying like it’s 1929. That and ill-advised total reopenings like those of Gov. Abbott in Texas, when all we need is for people to chill for another month or so, may reverse some of the progress we’ve made.

But the vaccines have been spectacularly successful, and their massive rollout has given the U.S. a huge competitive advantage. Meanwhile, the U.S. market has no peers in its range or depth. Looking for the most innovative technology and biotechnology companies? The U.S. has plenty of them. Consumer products giants? Ditto. Airlines, cruise lines, and hotels? Check. Some of the world’s best capitalized banks? Yup. Hundreds of small companies growing rapidly into big ones? Them, too. You can get all the diversification you need here without owning, say, European banks or Japanese auto manufacturers or oil companies trading in London, whose diversifying benefit is theoretical at best.

The numbers tell the story. From the bear market bottom in March 2009 to the bull market top in February 2020, the Vanguard Total Stock Market Index ETF
 racked up a 535% return while the developed market iShares MSCI EAFE ETF
 gained 203% and the iShares MSCI Emerging Markets Index ETF
rose 181%. 

From the depths of the COVID bear market last March through last Thursday’s close, that developed-market ETF gained 69% and the emerging-market ETF 79% — pretty attractive gains. But that U.S. ETF racked up a 91% gain.

In fact, U.S. stocks have demolished developed and emerging-market equities over much longer periods. According to the Credit Suisse Global Investment Returns Yearbook 2021, produced by researchers Elroy Dimson, Paul Marsh and Mike Staunton, developed international market equities have posted real annual after-inflation returns of 5.4% (in U.S. dollars) from 1900 through 2020. Emerging markets had real returns of only 3.9% over those 120 years, while the U.S. easily surpassed both, with a 6.6% annual real return. And U.S. markets have been extremely consistent, with similar returns over the last 20, 50 and 120 years.

Are we about to see some big reversal? Not likely. The U.S.’s vaccination juggernaut and rapid economic recovery should give us a big edge for years to come. Rates are rising here, too, and so is the dollar, which kills the case for emerging markets. And under exactly what scenario would U.S. stocks tumble while developed or emerging markets rise?

Amid today’s speculative excess, I wouldn’t be throwing money at equities now. There actually are a couple of overseas markets worth investing in, and I’ll get into them in a future column. But for the money I do have invested in stocks, I’m sticking with what was my best call of the past decade. Because in the 2020s, as was in the 2010s, U.S. stocks will be the only game in town.

Howard Gold is a MarketWatch columnist. Follow him on Twitter @howardrgold1.