If nothing else, the events of the last couple of years have taught me that American investors apparently don’t bother to read the headlines any longer. I mean, how else can you explain the stock market’s torrid performance over the last 2-years, juxtaposed with the unrelentingly bad news?
Great question.
The vast majority of us feel the country is headed “in the wrong direction.” Few among us believe the economy is really as strong as Washington has been telling us. We have become so desensitized to the war in Eastern Europe it barely gets any meaningful “ink” these days. The ongoing conflict in Gaza has likewise found a home on the back pages, as has whatever Israel is doing in southern Lebanon. Syria’s government fell over the past weekend, and it was difficult to find adequate coverage of the story on U.S. media websites. In aggregate, global leadership, especially in the “West,” seems inadequate to the tasks ahead of it.
The list of negativity is endless, but the markets continue to soar. For its part, the U.S. dollar has found renewed strength, and is all but threatening to make other global currencies meaningless. Further, foreign investors have poured money into the domestic financial system this year. This despite the Federal Reserve cutting the overnight rate, which should make U.S. deposits less attractive.
That is unless everywhere else is in worse shape than we are.
Inherently, Americans are more isolationist than anyone would care to admit. For all of our self-flagellation over the last decade or so, the rest of the world doesn’t really interest us all that much. For instance, as recently as 2022, only 34% of Americans could find Taiwan on a map. Never mind the fact the island country has been one of the biggest geopolitical flashpoints for decades. Can’t find it, which would suggest folks don’t have a real clear idea of where the People’s Republic of China is either.
Personally, and relatively recently, I had breakfast with two people from Belgium. They were gob smacked I had even heard of Ghent, that I knew the extent of World War I fought on Belgian soil, and that I knew the country was split between the Dutch-speaking north and French-speaking south. That is a pretty thin soup as far as an entire country of close to 12 million souls is concerned. Still, they weren’t used to meeting an American that knew anything at all about their country, other than waffles.
But why are we so willfully ignorant of the wider world? Why doesn’t the current laundry list of geopolitical nightmares concern us?
As Sam Clement and I discussed on our Trading Perspectives podcast this week, the reason could be that the U.S. economy and financial system might be more immunized from the world’s woes than the rest of the world is from ours. Another way of putting it: “when the U.S. catches a cold, the rest of the world catches the flu. However, when the rest of the world catches a cold, we simply say gesundheit.” There might just be some irony in there somewhere.
For all intents and purposes, and despite China’s best efforts, the global economy sort of runs through the United States, either directly or indirectly. For instance, the largest holding in the $55+ billion iShares MSCI EAFE ETF (EFA) is currently Danish pharmaceutical giant Novo Nordisk (NOVOB). Obviously, the domestic Danish market of roughly 6 million people isn’t enough to make it a household name in the U.S.. After all, that is about the same as either Wisconsin or Maryland.
Therefore, it isn’t terribly surprising to learn NOVOB gets about 60% of its revenue from North America, read primarily the USA. Interestingly, despite being headquartered in a European country, the company only gets a little more than 20% from EMEA (Europe, Middle East and Africa). I suppose the remaining 15% would have to come from Asia and South America.
Next up in EFA, which is obviously a massive international fund, is Dutch technology concern ASML Holding NV. In fiscal year 2023, this company generated $3.15 billion in revenue from the United States, $25 million in the Netherlands, $1.21 billion from the remainder of the EMEA and a whopping $23.18 billion from Asia.
While the United States isn’t as big a market for ASML as Asia is, it is still almost 3x more important than the entire continent of Europe, the continent of Africa and the Middle East…combined. That sort of thing is kind of hard to grasp. To be sure, many of our large international firms generate more money “overseas” than they do in the United States. However, I can’t find one where the U.S. isn’t one of the dominant individual markets (countries), if not the dominant one.
Our domestic consumer is vast and fat, and our corporations span the globe like no others. Consider Forbes most recent list of the world’s most powerful brands. In order from 1 to 20: Apple, Google, Microsoft, Amazon, Facebook, Coca-Cola, Disney, Samsung, Louis Vuitton, McDonald’s, Toyota, Intel, NIKE, AT&T, Cisco, Oracle, Verizon, Visa, Walmart and General Electric.
As an aside, the inclusion of Verizon and General Electric on this list causes me to question its veracity. However, it is what it is, and Forbes should update its website if it is what it ain’t…or something like that.
So, what is that? 18 out of 20? While the rest of world catches up a little bit from 21-100, it isn’t by much, as American firms dominate the list in both absolute and relative terms. Frankly, if this list is anywhere close to being accurate, that is a pretty pathetic showing from the remainder of the world.
When taken together, instead of asking why don’t American investor pay greater attention to what’s happening in the wider world, a better question might be: why would they? That might sound xenophobic to the point of being ignorant. However, that doesn’t mean it isn’t mostly true.
Then, there is the issue of where the profit resides. Let me give you a hint, it isn’t anywhere else and it isn’t close. Consider this data set from tradingeconomics.com. (You will have to following the link to see the actual data). However, I have already done the math (including currency adjustments), and the combined corporate profitability for all the “other” countries on the list (Australia, Canada, China, Czech Republic, Estonia, Germany, Japan, Poland, Russia and the United Kingdom) doesn’t total 60% of that of the United States.
Its corporate dominance is hard to fathom, seriously.
In so many words, the United States is where the revenue and profits are in the global economy.
No, no, no….that doesn’t mean the rest of the world isn’t important. It is. However, the data makes a perfectly logical argument why American INVESTORS are kind of myopic. There is simply too much money and too many dominant companies in the world’s most dynamic economy.
That is why Americans have arguably ignored the world around them even more so than normal the last several years. Why focus on the all that negative jazz half a world away when there is money to be made here in the United States? It might sound a little crass, but…indeed.
And that, my friends, is how a 50-year old dictatorship in a politically sensitive section of the world can topple over the weekend and Americans forget about it by the time the bell opens trading on Monday.
Have a great weekend, Merry Christmas and Happy Holidays.
Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows on this and every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.
John Norris
Chief Economist
Please note, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as well as those of our Investment Committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.