The United States or the Rest of the World?

The United States or the Rest of the World?

Bryan Taylor, Chief Economist, Global Financial Data


              Financial advisors recommend that you allocate your investment funds between stocks, bonds and bills and allocate a portion of your portfolio to international investments as well as domestic investments to reduce risk.  Few people outside of the United States can ignore investing some portion of their portfolio in the United States.  Not only does the United States represent almost 60% of global investible stocks, but the United States has consistently outperformed the rest of the world during the past century. During the past 13 years, US stocks have returned 12% per annum while stocks invested in the rest of the world have returned only 4.77%. The United States has seized on the technological changes that have occurred since the 2008 Great Financial Crisis and has delivered growth to investors.  The large-cap tech stocks have led the way in outperforming the rest of the world.

              But will this continue? Are American stocks overvalued and is it time to switch to non-American stocks? Or should investors continue to ride the All-American wave? What can we learn from the past to inform us about the future?

The Phases of American Performance

              If you look at Figure 1, you can see a comparison of the relative performance of US stocks and non-US stocks since 1900.  An increase in the value of the index signals US outperformance and a decline signals US underperformance.  We can break up the relative performance of US and Global stocks into eight phases over the past 125 years.


Figure 1.  United States GFD 100 Divided by GFD World x/USA Index, 1900 to 2023

              Before World War I, capital could flow freely between the different countries of the world.  Foreign stocks were free to list on other exchanges. Stocks and bonds paid dividends and interest in different currencies according to where the stocks and bonds were listed. Because they had deep capital markets, both Paris and London traded hundreds of stocks from different countries, and investors were free to buy shares in companies from almost any country in the world.  Stock performance was similar between different countries.  Low returns in stocks from one country would lead to funds being withdrawn and invested in another country.  Most of the return came in the form of dividends, not capital appreciation. Consequently, up until World War I, differences between returns to the United States and other countries were small.

              When World War I began, stock markets closed in most major markets, and countries put up barriers to the free flow of capital. What was once one large international market became dozens of individual national markets.  Countries in Europe, especially the countries that were defeated during World War I, struggled to recover.  Capital flowed to the victors, especially the United States, which loaned billions of dollars to European countries.  The American economy, and especially its stock market, boomed and the US outperformed the rest of the world dramatically during the 1920s.

              The Roaring Twenties, however, ended in a crash and the Dow Jones Industrial Average declined over 85% between 1929 and 1932.  The Great Depression took over the American economy and investors avoided American stocks during the rest of the 1930s.  The US underperformed the rest of the world until the start of World War II.

              After Pearl Harbor was bombed and the United States entered the war. The US stock market staged a dramatic recovery while foreign markets sank under the pressure of the war. The United States produced the goods that the rest of the world needed. The most dramatic outperformance came in the 1940s when war, nationalizations and controls on investing limited the performance of stock markets in Europe.  After World War II was over with, the stock market in every country recovered.  It was the trente glorieuses in France and the Wirtschaftswunder in Germany, but the United States continued to outperform the rest of the world.  Even in the 1960s, there was a final period of outperformance until the Vietnam War and stagflation slowed the American economy.

              Between 1967 and 1988, American shares underperformed the rest of the world.  Between Vietnam, price controls, Watergate, OPEC and stagflation, the United States fell behind.  Moreover, during the 1980s, the rest of the world opened their economies to trade, stock markets and capitalism.  Developed countries privatized the industries they had nationalized after World War II, and emerging markets opened their markets to the rest of the world.  The Asian Tigers, Japan, Taiwan, Korea, Hong Kong and Singapore all showed rapid growth as each country promoted exports to the United States and the rest of the world.

              During the 1990s, the internet and telecommunications became important parts of global commerce.  Computers and biotech became sources of growth globally.  At the forefront of these changes was the United States.  Technology corporations developed products that were used worldwide. and this phase of the technology revolution spurred growth in US stocks, driving the ratio of the US stock market capitalization to over 100% of GDP.  The boom created a bubble in the late 1990s that the United States benefited from.

              Once the internet bubble burst in 2000, money flowed back into the countries that had been ignored during the 1990s, especially emerging markets, which did well until the Great Financial Crisis of 2008.  Emerging markets did better than Europe and staged a large rally that global investors benefited from.

              Once the Great Financial Crisis hit, however, money began to flow back into the United States and has been doing so since then.  The 2010s were the decade of Apple, Alphabet, Amazon, Microsoft and Meta/Facebook.  All those corporations, and now Nvidia achieved market caps of over $1 trillion and Apple has recently hit a $3 trillion market cap.  The internet and telecommunications enabled these companies to provide their services throughout the world and take advantage of new technology faster than firms in other countries. But will this last?

GDP and Stock Market Capitalization

              Two other ways of looking at the American stock market relative to the rest of the world is to measure US GDP as a percentage of World GDP, and US stock market capitalization as a share of World stock market capitalization.

              Figure 2 shows US GDP relative to the rest of the world over the past 175 years. In 1850, the United States represented only about 5% of global GDP.  Its share rose steadily to around 20% when World War I began, then increased to 40% of global GDP during the 1950s.  Since the 1960s, however, the United States’ share of global GDP has shrunk.  Although the United States has only 4% of the world’s population, it represented about one-third of global GDP at the beginning of the twenty-first century and over one-quarter today.  You can draw a correlation between the peaks and valleys in GDP with the outperformance of the US stock market over the rest of the world in Figure 1.


Figure 2. USA GDP As a percentage of Global GDP

              Figure 3 looks at US stock market capitalization relative to the rest of the world.  The graph underestimates America’s share of global investing because it includes all stocks regardless of how easy it is to invest in those companies.  If you limit the data to investible companies, the United States currently represents about 60 percent of the global stock market, not 40 percent as the graph suggests.  This is because many shares in emerging markets, such as China, are not readily available to invest in.

Nevertheless, Figure 3 shows the trend in the United States’ share of global stock market capitalization.  The trend was upward from the end of the Civil War until the 1960s. For 100 years, US stock market capitalization grew at a faster rate than the rest of the world, not only because of policies that encouraged growth in the United States, but policies in the rest of the world that discouraged growth and technological change.  Eastern Europe, Russia, India and other developing countries would all have a higher standard of living today if they had not favored communism and socialism over capitalism and free markets.