Listen to the music

"We come in the age's most uncertain hours
And sing an American tune"
– Paul Simon

American soul-searching is not new. As its 47th presidency approaches, the mood seems especially febrile, but it is now half a century since Paul Simon borrowed an Old World melody to lament the ‘shattering’ of New World dreams. Allen Ginsberg claimed famously to have seen the best minds of his generation ’destroyed by madness’ almost two decades before that – and he wasn't the first soul-searcher either. In the post-war literary world, ‘The Great American Novel’ is not about a great America.

Nor has the rest of the world been slow to diagnose American faults. Its foreign policy has offended many, sometimes with good reason. We no longer wish or expect the US to police the world. The ‘Washington Consensus’ sits uneasily with a net government debt burden of 98%. America for many is synonymous with materialism, brashness, insularity, hubris.

All of which makes the continuing dominance of the US economy and its capital markets the more remarkable. The US still accounts for roughly 29% of global GDP, making it the biggest economy in nominal terms (compared to 19% and 16% for China and the eurozone respectively). China's economy is bigger in purchasing power parity (ppp) terms, but the US's drives the global business cycle.

Other countries are more prosperous on a per capita basis – notably, Switzerland and (recently) Ireland – but America's mix of size and productivity spreads general prosperity furthest.

For sure, the gains could have been distributed more fairly within the US: some measures of median household real incomes have barely grown in recent years. But even if such measures accurately allow for the improved quality of goods and services (and there is an ongoing debate about this and other measurement issues), they ignore the fact that many more households are at such income levels nowadays.

The US is not immune to the productivity angst overshadowing other developed economies in recent years, but it seems to have fared less badly than Europe in this respect – and there is a very active debate about measurement issues here too.

The Federal Reserve is by far the most influential central bank, and the yield on the 10-year US Treasury note effectively provides the global ‘risk free’ discount rate. US Federal borrowing – and its ongoing mismanagement – is embarrassing, as noted; but the debt is usually willingly bought by investors who are not short of alternative borrowers to fund.

The US dollar remains the biggest reserve currency, even as economists vie with one another in predicting its terminal decline. It will not – it cannot – be replaced by the renminbi as long as China maintains capital controls and runs a structural current account surplus. Nor does bitcoin pose a threat.

The US stock market now comprises 65% of the widely-watched MSCI All Countries global index by market value. In total return terms, it has outperformed the rest of the world, in common currency terms, by roughly 200% since 2007. Much of this outperformance has reflected rising valuations: its price-to book ratio has doubled, while the rest of the world's is little changed. However, MSCI earnings per share have also outpaced those in the rest of the world, and US Inc is markedly more profitable than its peers (its return on equity (RoE) is about 5-6 percentage points higher on average).

Strikingly, while US nominal GDP growth has lagged behind China's nominal GDP growth (in USD) by roughly 6 percentage points annually since China's accession to the World Trade Organisation at end 2021, US MSCI earnings per share have outpaced those in China by two points annually.

The underlying drivers of this outperformance are unclear. A growing population has boosted growth overall, but can't easily explain per capita GDP. Its unified domestic market, its work ethic and culture must be playing a role – as of course must its openness to innovation in technology and working practices.

The US model is often said to be one of undiluted free enterprise, but as economist Mariana Mazzucato reminded us a few years back, the US government has happily intervened on occasion to support research and development in healthcare, defence and indeed the internet. Nor is it afraid to challenge mergers and acquisitions if it believes they threaten national security and competitiveness (a tendency which long pre-dates the Trump administration).

Nothing grows to the sky, of course. The stock market's recent AI-led advance has been unusually narrow, and expectations about what artificial intelligence might reasonably be expected to deliver look a bit naïve. Arguably, the long period of US tech-led outperformance casts a shadow over the wider case for global equity investing: it's looked not so much like ‘stocks for the long run’ as ‘US tech names for the long run’.

At some stage the US will fall from economic and financial grace, and perhaps for more prosaic reasons than the angst and political concerns noted above. As we have often noted, the political complexion of the occupant of the White House often matters less than does the evolving business cycle in driving the US (and global) economy and markets, and at some stage the US economy will likely stumble whoever is in office (we preview the presidential election more carefully elsewhere).

Calling the turn is not easy, however. Economists have talked about an imminent US recession for most of the last two years, during which the economy has if anything grown a little more quickly than usual. The flipside of the bigger government deficit has been a healthy private sector financial surplus: there are few private sector excesses to be purged.

So as we move through the last quarter of 2024, then, it feels premature to be betting against the US – just as it did when we entered the first. Indeed, for most of my working lifetime, global investors have ignored the US at their peril. Listen to the music, read the literature – just don't sell the stock.