U.S. Stocks Have Never Been This Overhyped or Expensive
23:56 Share

Walk in the money for the rest of us. This is a personal finance show on money, how IT works, how to invest IT, and how to live without worrying about IT and your host David time. Today is episode five three.

It's title. U. S stocks have never been this overhype. Yesterday, I pulled up our acid camp act.

This is our stock and bond market index research, too, and I wanted to see the updated data and see what was the top performing stock indexes in november for the forty six stock markets around the world we track, the top seven were U. S. Stock indexes, including midcap growth, which was a leading performer.

IT gained over twice percent last month. If we compare U. S.

Stock returns overall, this would be representative by the S. M. P. Five hundred index, the topic of episode five hundred of money, further rest of us, U, S, A, stocks return six point two percent in november. The rest of the world, excluding U.

S, so the msci all country world X, U, S fell point nine percent in U. S, dollar terms last month. The level of our performance to the U.

S, is a student year to date, twenty eight percent return compared to only seven point six percent from all country. World X, S includes emerging markets. One year, U. S. Stocks have outperformed nine U. S.

By twenty percentage points by almost eight percent tage points over three years, by ten percent tage points over five years, eight percentage points over ten years and five percentage points over twenty years. Why in the world would we ever not put all of our stock investment in U. S.

Stock market? What turns out? There are some reasons why, but doing so LED to massive under performance over the past decade.

If we go back to the end of the bar mark good, in march two thousand nine, an investment in an S M, P five hundred index found etf would have returned one thousand percent. You would have made ten times your money investing in the s. And p.

Whether had you invested outside of the U. S, you would have only returned two and a half times your money. So at two hundred and seventy percent return compared to a thousand percent return for the S, M, P, five hundred investors in the U.

S. Are credibly bullish, especially after U. S. Presidential election, with perhaps lower taxes, reduced regulations, terms.

S, that could benefit U. S. Companies compared to the rest of the world. As an asset camp, we have a ten year stock market performance attribution.

I look at that every month, and we share that as part of our monthly weber for ask camp users. Over the past decade, as I mentioned, U. S.

Has return twelve point four percent analyzed compared to non U. S, including emerging markets, four point eight percent. But our performance has been driven by U.

S. Stocks getting more expensive that added over three percent of points to return. Where is a strengthening dollar non U S dog? Two percent tage point.

U. S. Dogs have grown earnings faster, seven point four percent compared to five percent earnings growth for developed non U. S, and only four percent earnings growth non U. S, including emerging markets.

In that explode five hundred, we talked about how golden sex was predicting a three percent analyzed Normal return for the S. P. Five hundred over the next decade with the rain between one and seven percent.

If that happens, IT will be because earnings growth has slowed, valuations have gotten less expensive. After episode five hundred, where we talked about U. S.

Stocks in the hundred, I got an email from a listener that talked about some intangible elements, or even tangible elements, that could be contributing to U. S. Stock out performance, such as the superior availability of capital that U. S.

Companies have access to to best in new products and services, the network of venture capital investments for startups, perhaps a immigration and higher education system that tracks top technical entrepreneurs, talent from the around the world, maybe it's more productive and efficient companies with greater profit Marks. All of those things clearly do benefit the U. S.

To some extent, and they're contributed to strong stock market returns. Many of those factors would call less into higher earning throwing per share, and that's what we've seen over the past decade. In this subset, though, we want to look at certainly things that are in favor of the U.

S, but also some things that should give us pause before we sell all our nine U. S. Stocks and planet all in U.

S. stocks. Before we continue, let me post and share some words. One of this week sponsors i've been telling you for over a year how please, i've been with delete me.

The subscription service are used to remove my personal data from data brokers. Delete me recently. Let me give give subscriptions to anyone I chose. So I gave them to my sons, and they have been using the service and been excited to get their first report to see what data of fairs has been removed. You see, data brokers make a profit of your data.

Your data is a commodity, and anyone on the web can buy your private details, and that can lead to identity theft, fishing attempts, harassment and unwanted spam calls. But now you can protect your privacy like we do with delete me. Delete me will send you regular personalized privacy y reports showing what information they found, where they found IT in what they removed. And it's not just one time service. Delete me is always working for you constantly monitoring and removing the personal information you don't want on the internet.

To put simply, delete me does all the hard work of wiping your and your family's personal information from data workers website take control of your data and keep your private life private by signing up for delete me now with a special discount for a listeners and their loved ones today get twenty percent off you delete me plan when you go to join delete me dot com slash David twenty and use promo o David a the only way to get twenty percent off is to go to join delete me that comes last David twenty and enter code David twenty a check check out that's joined the limit that comes less David twenty cold David twenty now, there was recently an article in the economist, and they pointed out how the average american worker will generate one hundred and seventy one thousand dollars in economic output. This is a measure of GDP per capital or per person. Hundred hundred and seventy one thousand compared red to a hundred twenty thousand for the euro area, hundred eight thousand in britain and ninety six thousand in japan.

The U. S. Is producing more per person. There are more productive in terms of what the economy produces.

And the prickly that growth rate that got to one hundred and seventy thousand has been about two percent per year per capital G D. P. Growth since eighteen sixty.

Now some will point out where the U. S. is.

More productive creates more wealth per person, more income per person. Because us. Workers work more hours than europe.

You care japan. But even correcting for that, the U. S.

Is wealthier and more productive. Conney points. L, A number of reasons. One is investment. The us. Has invested a higher percentage of GDP in all things that lead to faster grow. That includes infrastructure like highways, warehouses, IT includes investment in leading technology.

There is the defense advanced research project agency, darpa, that invest billions of dollars a year in new emerging technologies. Their investments over the decades have contributed to the development of the internet, global positioning systems and even M R N A vaccine. Ines, with exception of asia and south korea, U.

S. Invest more and R N D than any other country. About three and half percent of G D P. China is also pretty close to that three and half percent level, but the absolute dollar amount is more in the us.

Economist Charles eyes, Jones is with stanford, wrote paper that are link to the talks about the key to long term economic growth, that two percent year over year, real growth in GDP per capital comes down to ideas. Income per person, he writes, depends on the total number of ideas ever discovered. 嗯， those ideas come from researchers, entrepreneurs' entities.

So if we have more people, more researchers and a Better educated workforce, that leads to more ideas, which is what leads to economic growth, greater productivity. Over the past two decades, productivity growth has slowed and population growth is slowing. There's some suggestion that ideas are harder defined, but educational attainment is stagnating, that bureaucracy and red tape is making a more difficult for new companies to form or to advance new ideas, not when the financial times by russia.

Shara, whose chair of rockfall international, his calculations found the productivity growth has fAllen the most in the european union due to excessive regulations, also fAllen in the us, but least dramatically. So the us. Has invested in ideas over the decades. It's invited talent in IT has a vast network to find new ideas and new startups.

And that has helped is also a great deal of dynamism in the us, which economists points out the number of companies that are formed and dissolved in the year, about twenty percent of companies annually, compared to only fifteen percent in the european. The U. S.

Labor force is more dynamic in any three month period. Five percent of the workers in U. S.

Change jobs. Economist points out that would take a year in italy to see that level. Labor turnover ver. That occurs within three months in the U. S.

They point out that, that employment turn and the willingness workers the move at a state leads to more workers going in to the most productive sectors. And when we look at what are the areas the greatest productivity increase in us, it's been in tech, finance and professional services. That's where the U.

S. Is leading a productivity increases wherein other sectors such as retail europe is also very strong. Here's a thing though, about advances in technology. In the spreading of new ideas, there is knowledge.

I'll link to a couple academic studies where they focus on how due to technology transfer, I mean, think of what's going on with A I right now. The ability to use A I is available most of the world, even though a lot of the major companies are in the U. S.

We cannot benefit from that. And when we look at the data over time, IT shows that the growth in the economy GDP about a two percent per year that's been consist in across other countries. Also, U.

S. Is not growing economy that dramatically faster than other countries. It's gotten ahead. start.

So IT remains wealthy in other countries and there has been periods of greater productivity growth. And the slow and and productivity growth is has slowed less in U. S. The overseas. But over longer periods of time due to technology transfer, knowledge spill over other advanced economies and developing countries, they are also able to grow.

And because everybody y's growing, those that are wealthier remain the wealthier countries that you don't see a big catch up in terms of, for example, developing countries overtaking developed economies in terms of output. Person, the biggest contributor to productivity growth is technology changes, but eighty percent what leads to increases in productivity. So no doubt when we we look at the U.

S, there are tangible and intangible elements that allow the s to have had high levels of productivity growth. It's LED to higher earnings pressure are growth and LED to significant out performance of U. S.

Stock market. But there are are also of something that would give us some part a link to a paper by James montier. He's with geo, and he refers to something called the collect profit equation.

And this is something that I was very stepped in, in the latter part of my professional career, following the great financial crisis, as I was trying to figure out, what could we have done Better? What do we miss? There are these macros, dentists, these formulas that explain on a macro basis what drives corporate profits.

And we've talked about micro o identities in the past. And this formula shows that overall corporate profit with public and private sector of its a function of investment by companies. If companies are investing in something, do that can lead to greater productivity, but those purchases flow to the profits of some other company.

When companies pay dividends, that income, that flows to shareholders, that could be spent buying things, which leads to higher corporate profits. Now those are the two main drivers, its investments and dividends purchases. But here's what reduces corporation. If household save more, they're buying less, and that would reduce corporate profits if governments run a budget surplus.

So the government is essentially saving, that means the government's taxing, receiving more in tax revenue, that is, than its spending, destroying money in the process, which means lower per profits because powful and businesses have less money to spend. Conversely, when governments run budget deficits than they're spending more than the receiving in tax revenue and that income closed into the economy and increases corporate profits, that has been a key driver of higher corporate profit growth over the past decade. The U.

S. Budget deficit to GDP, he was negative two point eight percent in december twenty fourteen after the tax cuts of twenty eight. By december twenty nineteen, even before the U.

S. Enter into the pandemic recession, the budget deficit to GDP was up to four point six percent. Then we had the pandemic, but even the recovery has been slow.

The twenty twenty three U. S. Budget deficit to GDP is six point three percent. It'll be six point four percent this year.

Now we can compare that to europe, where the budget deficit last year was only three point six percent. And so while their budget deficit expanded and I got a higher seven percent in twenty twenty, where is the U. S. A.

With double digits? They've reduced IT by half. But the us. Is running a budget deficit three percentage points higher than europe. And that budget deficit to GDP has ended, which means more income profits flowing to corporations because of that.

And so with the trumpet administration, with their focus on reducing government spending, reducing the budget deficit with a task force LED by elon mask, if they're able to succeed and reduce that budget deficit to GDP, that will have an impact on U. S. Corporate profits.

They'll be less income flowing to buy products and services by corporations. Now maybe that will be offset in other areas because the the trade deficit or surplus can also contribute to corporate profit as well as his household savings rate, as we mention. But we can ignore these microbial ors.

An expanding federal budget deficit, which essentially has doubled over the past decade, has helped contribute to the seven and eight percent earnings per share growth for U. S. Stocks, one of the factors that LED to higher earnings growth compared to the rest of the world.

Before we continue, let me pause and share some words from this week. Sponsors, when IT comes to creating your own business, the most important part is your ideas, anyone to protect those ideas, we recently used legal zoom to get trademark protection for asset camp. Legal zoom is everything you need to launch, run and protect your business all in one place, setting up your business properly and remaining compliant or things you want to get right from the git go, but you don't want to strain your brain or wallet.

Egoism saves you from wasting hours making sense of the legal stuff. Legal zone walked us through every step of the way and filing for our trademark application at legal zone that com, you can take care of business, legal needs and just a few clicks. And if you need some hands on help, their network of experienced attorneys from around the country has your back over the last twenty years. Legal zone helps start, run and protect millions of businesses.

So launch, run, protect your business to make IT official today at legal zoom 点 com and use promo o David tend to get ten percent off any legal zoom business formation product excluding subscriptions in reals expires twelve， thirty one, twenty four, get everything you need from set up to success on legal zoom dot com and use promotion de David ten lego's dot com and use promo o David ten disclaimer legos one provides access to independent attorneys and self service tools. Legal zoom is not a law firm and does not provide legal advice to except where authorized to its the law from L, Z, legal services, L, L, C. Another factor over the past few decades that have benefited U.

S. Corporations in their earnings growth relative to the rest of the world is a tax rates, the reduction and tax rates in twenty eighteen that help boost corporate profits. No, overall lower interest rates have LED to higher corporate profits.

So to extend that, interest rates remain elevated like they are and tax rates aren't lowered further or maybe even raised. We don't know that can impact corporate profit growth. Now there are a couple of other interesting factors when IT comes to U.

S. Stock market. U. S. Has deep financial markets. They're an attractive place to list the company.

And there are many companies that are based outside of the U. S. That the shares in the U. S.

Last month, the swedish vinta company corina announced that they were going to do an initial public offers and they're not listing the shares in. So we're gonna list the stocks shares in the us. And so just because the companies has publicly traded stock in U S.

Does not mean it's A U. S. company. Forty percent of the earnings of stocks on the S.

M, P. Five hundred come from overseas. Meanwhile, companies that have their stocks listed outside of the U.

S. Get twenty percent of their earnings from the U. S.

To global. world. Can't question that. That raises the question. Oh, well, if the earnings are coming from overseas for U. S.

List companies and the earnings are coming from the U. S. For companies that have their stock listed outside of the us, there's a some overlap there.

Why is IT that U. S. Stocks self for a Price to earning to ratio of twenty six point seven, over ten pots more.

Then the P. E ratio of fifteen and a half outside of the U. S.

Are the advantages in terms of investment productivity, longer working hours that much greater in the U. S. Compared to outside the U. S.

That those earnings, dear, a multiple is reflected in the P, E ratio, ten percent tage points higher because again, if we go back to that, that attribution world X, U S has higher dividends divided into three point one percent compared to one point eight percent for U. S. Stock market earnings growth, and this is developed markets, was five point three percent for nine U.

S. Dogs over the past decade. There is seven point four percent to the U.

S. Stock market. Again, a portion of that higher earnings per share growth was because the U. S.

Budget deficit expanded, doubled as a percent of GDP, and income tax rates drive the other big contributor for U. S. L. performances. The stock market got more expensive, went from A P, E.

00 point three up to twenty six point seven。 That added three point three percentage points of analyzed return was developed market outside of the us. There's stock market got cheaper.

D E, went from sixteen point seven down to fifteen and a half. That was a seventy basis point per year drag over the past decade. And then we mention the U.

S. Dollars strengthened by twenty percent of points over the past decade. And that caused nine U.

S. Stocks, two percent player. These are the long term factors, new mural factors that we can see.

There's all kinds of tangible and intangible things underlying this, factors that we've talked about, the investment activity, the dynamism. But here we stand at a precipice where U. S.

Stock market makes up close to seventy percent of the global stock market, but U. S. G, D.

P. Is on twenty six percent of the world. The U. S.

Stock market is the most expensive than IT has ever been relative to the rest of the world. The premium U. S.

Stock market has never been this high compared to non U. S. Stocks, and that's why the title of episode is the U.

S. S. Stock market has never been this overhyped, rare. Sharma, again in the financial time, said, amErica is overweg overvalued and overhyped to a degree never seen before.

As with all bubbles, it's hard to know when this one will deflate or what will trigger its decline, and we don't, which is why we continue to have an allocation. U. S.

Stocks, both in our model portfolio, examples on money for the rest, plus I have IT in my portfolio. Having non U S. Exposure has caused us dearly over the past decade, which is why it's it's kid.

Understand why? Understand how valuations added three percent tage points to return. Strengthening dollar reduced non U S. Return two percent. That's five percent points per year over the past dec. Valuations and currency, we have to understand the underlying drivers so we can make fact based decisions. Are not just buying to the hype.

There are intangibles, but there's also a technology spill over in other countries longer term, have been able to grow their output per person at the same level as U. S. Because of technology transfer, because their workers are also becoming educated, because they are inventing new ideas.

Also, unfortunately, living standards have increased around the world. I'm glad the U. S. Stock market has done incredibly well, but i'm also aware of the risk when valuations have gotten this hard. I was a professional adviser assisting institutional clients in two thousand.

And there was this level of height back then where growth stocks, in this case, where Price for perfection, and they became him perfect. And so we had seven, eight years where value stocks outperformed growth stocks. Now we've had an extensive period where growth stocks have absolutely a lateral values.

Talks and U. S. Talks have ablutions ated. The rest of the world cycles change. And that's why we share with you the data and provide tools for you like acid camp and a community, like money for the rest plus.

So we can talk about these things, share them and understand them and make black based reasonable decisions and not go to an extreme either way. But to understand. That episode three, thanks for listening. You may be missing some of the best money for the rest of the content. Our weekly inside sky aim on this letter goes beyond what we cover in our podcast episodes and helps elevate your investment journey with information that works best in written visual formats.

With the insider sy IDE, you can discover investing in economic insight provided only to our news letter subscribe, unlock greater investing confidence with high value slippers from our premium products plus membership and asset cap, further connect with the money for the restless team and community, and when you sign up, will also send you our exclusive investing checklist to help you invest with more confidence right away. You also get our introductory email on eight essential investment principles that IT followed, can make you a Better investor, will also share our recommendations for podcast episode ticks in books. The insider guide is the best next step to get the most out of your investment journey.

If you're not on the list, go to money for the rest of us that come and subsequent right there on the home page, everything I ve shared with you in the subset been for general education, and i'm not considered your specific risk situation, not provided investment advice. This is simply general education and money invested in the economy. Have a great week.