The recent surge in the U.S. stock market prices caught many by surprise. And, for a good reason. During economic recessions, the stock market is typically the first one to react. Negatively.
However, this time is different. Despite the March 2020 dip lower, the U.S. stock market regained its highs. Fueled by a relentless appetite for technology stocks, the market keeps punishing the losing and rewarding the winning companies.
Tech names like Microsoft, Amazon, Google or Zoom, thrive in such an environment. As more people sat home, demand for Internet products and online deliveries surged. Every U.S. corporation having an e-commerce section thrive since the COVID-19 pandemic. It is no wonder the market sits at or close to all-time highs – where to put the money if not in the largest tech corporations in the world?
This is just another story of a different crisis. Back in time, others existed. At one point, the home builders took the fall. At some other, financials were in trouble. There is always something going on, but there is also only one stock market that keeps delivering.
That is the U.S. stock market.
The Beauty of Compounding
For 75 years between 1921 and 1996, the United States stock market is champion in delivering a strong performance. Four or five percent per year may not seem much to many investors, but let us not forget the compounding effect.
In this case, compounding has two components. One is the reinvested dividend. Assuming that some of the companies in the portfolio pay dividends, reinvesting the dividend leads to a bigger performance than what the chart above shows. Another one refers to simply leaving an investment alone and managing it as a passive investment, rather than being involved actively. Passive investing refers to tracking the main stock market indices rather than trying to beat their performance.
Another striking thing coming out of the picture is the striking difference between the developed world stock market’s performances. For instance, Spain, Japan, Belgium, New Zealand, or Portugal – delivered negative performances, while Germany, the United Kingdom, Australia, or Ireland, are on the positive side.
Not much has changed since 1996. The United States continued to outperform due to the tech giants being born right about that time.
It is no wonder that the U.S. stock market is the world’s champion when it comes to the performance delivered. The two world wars left other countries behind. Communism and the Russian influence in Eastern Europe did the same. Only the United States remained the champion of capitalism.