Walter Wriston, legendary Citigroup chairman and CEO in the mid-20th century, famously said: “Capital will flow where it is wanted and stay where it is well treated.”
Global capital historically has been treated quite well in the U.S. And in recent years, because of global economic and market trends, the U.S. has been the primary place much of the world’s capital wants to visit.
Of course, this doesn’t stop Chicken Littles from squawking about how the U.S. market is doomed because the planet’s economies and markets are doing so poorly. They think that the world’s problems will come home to roost here. But they can’t get their head around the cause and effect. It’s precisely because of the world’s problems that its money will come here -- that global capital will continue to flow into U.S. markets for the foreseeable future, propelling growth.
This dynamic, which has fueled the U.S. stock markets to new highs in recent years, will be a significant factor driving market growth in the coming year. The U.S.stock market may not go great guns as it did in the 2009-2011 rebound from the 2007-08 decline, but it’s poised to chug along nicely, delivering returns that can’t be found abroad easily—if at all.
Anyone predicting a U.S. market slide next year--and there are always those who are predict this perennially, no matter what-- should take a hard look at the entire planet and consider the capital inflows that are bound to continue.
Regardless of whether the Federal Reserve raises interest rates, the U.S. bond market will likely perform well as it benefits from refugee foreign money seeking an investment oasis from the desert-like returns of most foreign markets. They may not get huge returns here, but they’ll get something—a highly attractive prospect compared to the tanking markets of China and long-term malaise in Europe, where people are actually paying banks to hold their money, rather than vice-versa.
U.S. bond yields, while hovering at record lows, are higher than that of many developed nations. Our yields beat those in Canada, Germany, United Kingdom, France, Italy, Spain, Netherlands, Switzerland, Japan, Hong Kong and many other nations.
Sure, economic growth is the U.S. has slowed. Gross domestic product growth fell to 1.5 percent in the third quarter as businesses cut back investment and inventories. Corporations have ratcheted down investment while observing the turmoil in world markets. China and emerging markets have been faltering, Europe has been stuck in an economic and political rut while dealing with a refugee crisis. All the while, commodities, led by oil, have been slumping. The antidote: U.S. stocks and bonds.
Another sanguine sign for the U.S. is consumer spending. Purchases have been brisk on key items including vehicles and furniture. And spending on health care and insurance in our graying nation rose at twice the pace of overall business spending in the third quarter.
Our falling unemployment and strong consumer spending makes the U.S. a relative bastion of stability. What’s more, the U.S. doesn’t depend on exports to keep the growth engine running. This augurs well for sustained growth because our economy is highly reliant on domestic consumption; the rest of the world’s economic and financial troubles have less impact here.
As a percentage of U.S. GDP, only 14% of our economy relies on exports. Out of 151 countries reliant upon exports, we’re among the least reliant, ranking 142.
Another good sign for the U.S. is that the S&P 500 dividend yield trended higher than the 10-year treasury twice this year, in January and September. This has only happened five times in the last 50 years and was followed the first three times by double-digit stock market gains the following year. In addition, the stock market usually does well in election years.
Corporate earnings remain strong, and while there has been a lot of press about the third quarter seeing the first market-wide decline in earnings per share since 2009, if energy stocks are stripped out, U.S. earnings for the period will likely be up between 3 percent and 7 percent. Keep in mind too that lower energy prices benefit corporations in myriad ways, from lower transportation costs to reducing manufacturing costs.
Growth naysayers point to stagnant wages as one reason for worry about the U.S economy, but that’s really not the case. Wage growth in this country isn’t booming, but it is increasing. According to a Heritage Foundation report, since the beginning of 2013, wages have grown between 1.1 percent and 1.9 percent per year. That’s right in line with the average real growth of 0.7 percent to 2 percent per year we’ve seen since the 1960s.
The main bogeyman for investors, and much of the reason for the swoon in U.S. stock prices in the third quarter, has been the slowdown in China’s economy and that government’s elephantine efforts to calm its investors.
China and its huge exports are important to the world economy, but the U.S. stock market is by far the largest, at 52 percent of the world’s capitalization at the end of 2014. China represented just over 2 percent of world market capitalization.
As the world’s second-largest economy and the biggest U.S. trading partner, China has a lot of influence on the U.S. Looking past the recent market turmoil in China, that nation will continue to mature, creating opportunities for U.S. multinational companies.
As for U.S. market corrections, we recently had one, so investors probably won’t have to worry about another one for a good while. As of October, 56 percent of small-cap stocks, 32 percent of mid-caps and 24 percent of large caps had lost 20 percent or more of their value, according to Lowry Analysis, exceeding the 10 percent threshold for a correction.
What does all this mean for investors trying to grow their 401(k)s? Stay the course. If you’ve got a diversified portfolio, stick with it. If you don’t, get one. Keep the majority of your equity holdings in U.S. stocks and be prepared for occasional corrections. And, instead of market gyrations, focus on your long-term goals.
Dave Sheaff Gilreath is a founding principal of Sheaff Brock Investment Advisors LLC. He has more than 30 years of experience in the financial services industry, beginning with Bache Halsey Stuart Shields and later Morgan Stanley Dean Witter. At Sheaff Brock, he shares responsibility for setting investment policy, asset allocation and security selection for the company's managed accounts. He also consults with the clients on portfolio construction. Gilreath received his Certified Financial Planner® (CFP) designation in 1984. He attended Miami University in Oxford, Ohio, where he earned a B.S. degree.
The opinions expressed in this article are those of Dave Sheaff Gilreath and do not reflect those of ABC News.