Putting It Into Perspective

The recent volatility in the stock market in the United States has put a lot of people on edge.

People are worried about their 401(k) balances and nervous about their financial futures. The political pundits take to the airwaves and tell us how bad everything is. The economists warn that a recession can't be far away.

However. it might be helpful to put all of this in a little perspective.

Since Donald Trump took office equity returns (despite the recent sell-off), as measured by the S&P 500, are still up over 26%.

To gain even better perspective, compare United States equity returns to that of the major European countries since the Fall, 2007 before the market and economic meltdown that took place in 2008.

In other words, equity prices are more than twice as high as they were before the 2008 stock market  meltdown in the U.S. while Europe has not even been able to recover to that level after more than a decade. 

In fact, equity prices in the United States have more than tripled from the bottom of the market in February, 2009.  

How do we compare to China?

Since President Trump took office the China Shanghai Composite is down 17% compared to the 26% advance in U.S. equity markets.

Here is a comparison of U.S. and China equity returns over the last 11 years.

What does this tell me?

It seems all that we hear from liberals and the mainstream media is how bad it is in the United States.

The markets don't seem to agree. And they have not agreed with that assessment for a long time.

At the same time. the wide variance in equity returns between the United States and these other countries should cause everyone to understand that this large a disparity is unlikely to continue. 

Looking solely at this you would guess that the United States equity markets would underperform relative to these other markets over the next ten years. There tends to be reversion to the mean over time when you see this type of disparity in market returns.

Consider as well the rise in interest rates in the United States over the last year. Interest rate increases make it difficult for stocks to rise for the simple reason that risk-free cash becomes more attractive relative to stocks. Money flows to where it is treated best.

However, who really knows what the future holds?

Look at the problems facing Europe right now. Riots in France. Brexit. Pressure from Trump to increase NATO defense spending. Credit problems in Italy, Greece and Spain. The risks of ending their quantitative monetary purchase program. John Mauldin in Thoughts from the Frontline has an excellent article this week on the problems facing Europe.

A good portion of Europe is still at negative interest rates. How do they move from there and not also further damage equity prices?

This chart gives you an idea where the US stands today on global rates.

China also has to figure out a way that they can deal with Donald Trump. They had free reign to do most anything they wanted for the last 25 years. What now?

China has borrowed heavily over the last decade. Well over half of all the private sector debt created in this decade has been in China. When you are this leveraged you desperately need revenue to service the debt. China needs to keep its factories running and it needs to be able to sell its products into the United States to do that.

It is never easy being an investor. The times we live in today are particularly difficult.

However, it is easier when you try to put everything you can in perspective.