Why the U.S. stock market is easy to trade


I’m not an American, but I only trade the U.S. stock market (about me). Here’s why the U.S. stock market is easier to trade than all other stock markets.

The U.S. impacts everyone else. But the opposite is not true.

Being the world’s pre-eminent financial force, the U.S. economy and stock market impact everyone else. When the U.S. economy falls and the U.S. stock market makes a significant correction or bear market (as defined by our Medium-Long Term Model), every other country in the world is adversely affected.
Here’s the U.S. bear market from 2000-2002 and 2007-2009. (S&P 500 chart)

Notice how the U.S.’ bear market brought down Germany’s stock market (DAX).

It also brought down China’s stock market.

It also brought down Canada’s stock market.

It even brought down Brazil’s stock market.

The opposite is not true. Foreign recessions/bear markets do not cause problems in the U.S. UNLESS those foreign problems start to impact the U.S. economy.
China’s stock market went down from mid-2009 to mid-2013. The U.S. stock market soared during this period.

Hence, U.S. stock market investors/traders only have to worry about the U.S.. Traders of non-U.S. stock markets need to worry about their own domestic problems AND potential U.S. problems.
U.S. stock markets (NYSE & NASDAQ) account for almost 40% of global stock value. Hence, the U.S. stock market dwarfs any other stock market. Meanwhile, U.S. GDP as a percent of global GDP is 24%. You can see why the U.S. has an outsized impact.

The U.S. stock market is easy to understand

The stock market and economy move in tandem over the long run. We use economic data to understand the state of the economy.
U.S. economic data is without a doubt the best in the world.

  1. The U.S. has some of the oldest economic data sets in the world, some of which span back to pre-WWII. Only the UK can compete with the U.S. in this regard. Other countries like Japan, China, Germany etc don’t have as much historical economic data.
  2. U.S. economic data is the most broad. The vastness of this data covers anything you can imagine: housing, industrial production, services, and the list goes on and on. Other countries such as China don’t have as many economic data sets as the U.S.
  3. The U.S.’ economic data is the most accurate. Some people argue that the government fabricates data, but this is false. This claim might be true in many developing countries, but not the U.S.. The U.S. employs 3000 statisticians to calculate the monthly Labor Report alone. No other country in the world dedicates as many resources to gathering economic data as the U.S.

Hence, I am constantly amazed at the breadth and depth of U.S. economic/financial data. No country even comes close, and I’m saying this from the view of a non-American.

The U.S. economy is relatively isolated

A nation’s stock market follows its economy over the long run. However, a nation’s economy will be impacted by foreign economies.
Fortunately, the U.S. is a relatively isolated economy. An American economic downturn is much more problematic to e.g. China than the other way around. This means that U.S. stock market investors need to mainly focus on the U.S. economy, while investors in other stock markets need to also focus on global macro forces.
Here’s the trade-to-GDP ratios of a few countries.

  1. U.S.: 27%
  2. China: 37%
  3. UK: 58%
  4. Canada: 64%
  5. Germany: 84%
  6. Hong Kong: 373%

The U.S. and China seem close (on the surface). But there are 2 key differences.

  1. The U.S. economy is much larger than China’s. Thus, the U.S. has a bigger impact on China than the other way around.
  2. The U.S. is a massive net importer. China is a massive net exporter. (Foreign problems only = domestic problems if you’re a net exporter).

Once again, Happy New Years everyone! Here’s to wealth and health in 2018 🙂
Kind regards,
Troy

6 comments add yours

  1. Troy — enjoyed our Skype chat the other day! Very cool of you to offer that.
    And your post reminds me of the two men being charged by a tiger.
    One stops to to tie his shoes, and his friend says, “What are you doing? You can’t outrun a tiger!”
    His friend replies, “I don’t have to outrun the tiger. I just have to outrun YOU.”
    If the US is affected less by global problems than other developed nations are, would that tend to push global investors into US stocks when global problems happen?
    Meaning, trouble elsewhere in the world not only doesn’t hurt us as much, but can actually help us, since we’re the (relatively) safest place to put their money?

    • That’s a very good point Dan (and great analogy by the way). The Chinese economy started to go downhill after 2011. What resulted was a FLOOD of Chinese money into U.S. real estate and other assets (e.g. Chinese buying U.S. companies outright).
      It also depends on the type of problem.
      A slowly-burning foreign problem can actually be good for the U.S. (e.g. China example).
      A foreign crisis will slow down the U.S. economy and stock market, but not enough to push it into recession/bear market territory.

  2. It makes total sense since there is so much data available in the US markets, it gives investors the ability to make informed decisions. This then generates more activity for the US market. I have foreign index funds, mostly because of diversification purposes. Thanks for providing the numbers.

    • Yes, it becomes a self-fulfilling cycle. More U.S. data = more investors in U.S. markets. More investors in U.S. markets = more data (services see demand for U.S.-specific data).

Leave a Comment