Americans
take pride in what’s called American exceptionalism. They were the
first country to practice democracy in modern times. They were the
first with no monarchy or aristocracy. America was the first country to
free itself from European control. It admitted new territories, not as
colonies, but as equal states. Americans let capitalism flourish, among
many other achievements.
So
it’s no wonder that some investors think that American stocks have done
exceptionally well too. After all, what started out as 13 British
colonies along the Atlantic coast has become by far the world’s largest
economy. But, while American stocks have done better than most, they
are not exceptional.
Australian and South African stocks won
History
shows that American stocks have performed well over time. From 1900
through 2012, they provided average real (removing the impact of
inflation) compound returns of 6.2 per cent.
Three
British economists—Elroy Dimson, Paul Marsh and Mike Staunton—examined
the historical returns of stocks and bonds in 19 countries from 1900
through 2012. A portfolio that invested a dollar in all 19 countries in
1900 would have generated an average yearly real compound return of 5.4
per cent. This is relatively close to the real compound return of
American stocks.
Both
Australian and South African stocks beat American stocks. Their average
yearly real compound returns from 1900 through 2012 were above seven
per cent.
Canadian stocks were in sixth place
Canadian
stocks were in sixth place—after South Africa, Australia, the United
States, Sweden and New Zealand. From 1900 through 2012, Canadian stocks
outpaced the stocks of the United Kingdom, Finland, Denmark, the
Netherlands, Switzerland, Norway, Ireland, Japan, Spain, Germany,
France, Belgium and Italy.
Many
of these countries suffered from economic disasters such as
hyperinflation, depressions and wars. Even so, the stocks of all 19 of
them experienced positive compound real returns from 1900 through 2012.
We
have often noted that American stocks outpaced American government
bonds and Treasury Bills. The longer the time period examined, the
greater the outperformance of stocks.
This
was also true of all 19 countries examined by Dimson, Marsh and
Staunton. On average, stocks returned 3.7 per cent more than government
bonds and 4.5 per cent more than T-Bills each year.
What’s
more, both government bonds and bills produced losses (negative
returns) in Italy, Belgium, France, Germany and Japan. From 1900
through 2012, for instance, Italian Treasury Bills lost value at an
average compound yearly rate of close to four per cent. This was mostly
due to inflation.
Meanwhile,
Italian stocks provided real returns of 1.7 per cent. True, this was
the lowest return of the 19 countries. But it was still far better than
the losses on Italian Treasury Bills and government bonds.
Companies can raise prices, bonds can’t
One
thing to keep in mind is that most companies can raise their prices
during inflationary times. This can shield these companies and their
shareholders from the worst effects of inflation. Ordinary bonds, by
contrast, offer investors no protection against inflation. They’ll
never pay more than they promised.
In
short, it’s worth buying American stocks to diversify your
portfolio--particularly when it comes to manufacturers and consumer
products and services companies. But since American stocks are not
exceptional, it’s worth buying stocks in other advanced countries as
well.
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We caught up with Martin Armstrong
today. We wanted to know if he was sticking by his call for Dow 32,000
and for the Dollar to remain the reserve currency. He stands by his them
and cites further proof that the wealthy are sending their funds to the
US. Wealthy Europeans, Canadians and Chinese are buying up properties
in the US. As far as the stock market, there’s no other place to put
large quantities of money. No one trusts the banks or sovereign bonds,
so the market can only continue going up.
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