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Three Factors Sparked Investor Confidence and Why We Focus on The U.S.

| May 27, 2024

Recently the Dow Jones Industrial Average* topped 40,000 for the first time ever. Interestingly, market bears growled, “Dow 40k and go away!”

Kidding aside, it should be noted the current bull run for stocks isn’t only led by the “Magnificent Seven.” Far from it. Here are three primary reasons why the market is trading at its current level and has healthy support moving forward.

First, “core inflation” finally is cooling. The consumer price index’s drop provided genuine relief after two months of higher-than-forecast numbers. April’s reading was +3.6%, a fall from March’s 3.8%, and in line with expectations:

The beginning of disinflation in April is only a small step forward. However, it provides comfort that the Federal Reserve remains entrenched in its “wait and see” mode. Still, even no rise in interest rates is bullish for stocks:

Second, bond yields fell despite the Fed leaving rates unchanged. Regardless of the “higher for longer” Fed speak, there are early signs of consumers beginning to show more discretion.

For example, April’s retail sales data was soft (0.0% versus a 0.4% expectation) and the University of Michigan consumer sentiment survey for May came in at 67.4% versus an expectation of 76.5%:

Consumers are showing spending discretion. This is a welcome relief from the years of “helicopter money” that was thrown around, which helped drive overall inflation, and is now driving Treasurys down:

April’s nonfarm payroll report, which was below expectations, further drove the current bond rally. In the end, it’s been a bullish game changer for stocks.

Finally, the market rally continued its improving breadth, as evidenced by consistently strong advance/decline lines. The most recent trading sessions reveal significant advances of gainers over losers:

To us, this is quite possibly the most vital component of the current rally.

The market is enjoying widespread sector participation, not the narrow leadership from the first half of 2023. Historically, well-defined market breadth is a strong technical sign the bull trend can continue over the intermediate term.

Overall, these three factors sparked investor confidence. In fact, Bank of America's Global Fund Manager Survey shows bullish settlement at its highest point in more than 2.5 years as 82% of investors expect the Fed to start cutting rates later in 2024.

Why the U.S. is an Economic Oasis, Comparatively

At Cornerstone we use objective data to guide our decisions. As such, we want to illustrate our thinking on why we overweight U.S. markets relative to other options.

To be clear, this is not a cheerleading effort on American superiority – the U.S. certainly has issues, just like anywhere else. Similarly, this is an apolitical position based on data that doesn’t consider emotions or which political parties hold power at any given time (remember, gridlock is good).

Instead, this analysis focuses on population trends, economics, and markets from the past, present, and future. In our opinion, these facts show the U.S. is the best choice for investors, with no indication of that changing.

The Past

In the eight decades since World War II, the U.S. has been the world's economic and investment leader. Still, a few rising nations have provided formidable competition, namely Russia, Japan, and China. But each one’s specific weaknesses caused them to flounder.

Going back to the 1960s, many people thought the Soviet system would surpass the capitalist West by the mid-1980s. But that government basically ran out of money due to poor allocation. The fall of the Berlin Wall in 1989 was the culmination of the decline led by choosing military empowerment over economic durability.

In the 1980s, Japan was a free market challenger, but blew its opportunity. An inflationary bubble that peaked in 1989 caused Japan to enter a 30-year deflationary funk.

The Present

Now China is the most recent challenger. But we’ll show how China’s demographics puts it in danger of going the same way as Japan and Russia.

As an aside, there is an increasing narrative that India will become the next power, especially after its recent strong GDP growth. But we’d argue India has more long-term structural impediments than China and Japan combined.

India has 5% inflation, a 7.6% jobless rate, a 5.3% debt-to-gross-domestic-product ratio, 7.2% interest rates, and a falling currency. Furthermore, The Economist showed that out of India’s billion working age citizens, only 100 million or so have formal jobs. Those figures don’t support the industrial manufacturing evolution that would be necessary to bring it to China’s level even 10 years ago.

A recent Wall Street Journal article was telling:

  • The U.S. will account for 26.3% of global GDP, which is the highest in almost two decades:

  • According to the International Monetary Fund, since 2018 Europe’s share of world GDP dropped 1.4% and Japan’s by 2.1%, while the U.S. share rose by 2.3%.
  • While many predicted China's economy would be the largest in the world by now, since 2018 China's economy slipped from 67% to 64% of the U.S economy.
  • After a short-term blip through the financial crisis of 2008, the U.S. continued to increase its market capitalization relative to the world, going from 41% to over 60% since 2010:

The Future

Despite all the issues we Americans see daily, there are solid reasons to think the U.S. will remain a global leader going forward.

One of the most important factors is continued population growth. Economies need additional economic contributors. And unlike most of the developed world, the U.S. still has natural population growth (as well as first-generation immigrants building families here):

While there are obvious issues on the U.S. immigration front, from a population growth standpoint, they don't compare to the problems within China and Japan. Those nations have mostly closed borders and will not assimilate immigrants in any meaningful manner.

A growing population is a necessary piece of the puzzle for continued economic growth and stability. United Nations long-term projections for natural growth and immigration show the U.S. on an uptrend, albeit with a declining growth rate over time:

Comparatively, Europe’s growth rate is already negative and is projected to keep decreasing at a significant rate over the next eight years (see below). Worryingly, two of the continent’s biggest economic powers – France and Germany – are the main culprits and don’t seem to have any policy changes in mind to remedy the situation.

Lastly, China is already experiencing a population growth rate decline that’s expected to accelerate precipitously over the next 80 years (see below). This will cause significant issues within its industrial manufacturing sectors because workers will be more difficult to find. Also, China won’t have the necessary working population to support its social welfare programs.

These are vital data points to understand prospects of economic and investment strength on a forward-looking basis. These reasons, along with other geopolitical risks, are why we keep our overweight focus on U.S. markets currently.

Think of it like this: the U.S. is the most popular among 50 large nations competing for people and ideas on a global scale. Right now, it continues to attract the best and brightest minds. That's why most of the new inventions and innovations come from American shores and not overseas.

Quick, name the top three innovations from Europe or Asia since 1980. Sure, other nations can copy or steal technology, but do they create new ideas? Overall, the answer is no.

The fact remains that the most creative minds in the world often migrate to the U.S. to innovate. Such innovation is the backbone of American economic and investment leadership. And it seems that will continue for a long time. That’s why we focus on the U.S.


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* The Dow Jones Industrial Average is a stock index tracking 30 large, American, publicly owned blue-chip companies and is generally considered representative of the broader U.S. economy.

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