Why The American Market is the Goose That Lays The Golden Egg

There's no denying that 2022 has been a roller-coaster ride for the US stock market so far.

Between inflation, rising interest rates, a war in Europe, supply chain issues and fresh COVID-19 lockdowns in China, many issues have rocked the boat. 

There's a lot of uncertainty going around about where markets are headed over the next couple of years. But, zooming out and examining the historical view of the US equities market paints a very optimistic picture. 

America has long been the place of innovation and opportunity, and that's unlikely to change. 

But don't take our word for it, take Warren Buffett's. 

In his 2016 annual shareholder letter he wrote, 

"For 240 years it's been a terrible mistake to bet against America, and now is no time to start. America's golden goose of commerce and innovation will continue to lay more and larger eggs. America's social security promises will be honored and perhaps made more generous. And, yes, America's kids will live far better than their parents did."

American Innovation

America's research and development institutions are responsible for some of the greatest inventions in history. 

These have spanned across several industries. From the airplane (1903) to the MRI machine (1971), to the iphone (2007), many products have been created over the years that have shaped our daily lives. 

The Bayh-Dole act of 1980 was arguably the most transformative piece of legislation to be enacted in America. It permitted scientists, businesses and universities to patent and profit from discoveries made through taxpayer funded research, unlocking inventions that had been made in US laboratories. 

When COVID-19 hit in 2020, many questioned the speed at which a vaccine could be developed (if at all!). On December 11, 2020, this question was answered when the FDA issued the first emergency authorisation for a vaccine that would be developed by New-York based biotech company Pfizer. When the world was in turmoil, it was American innovation that delivered. 

While we cannot predict the challenges that lie ahead, we can be confident that America stands ready to meet the moment. 

America's wealth

As Buffett noted, the American market has generated enormous wealth over the past two centuries. 

With 735 of 2,668 of the world's billionaires calling the United States home in 2022, the US certainly punches above its weight when it comes to wealth accumulation. This means that over 25% of billionaires are US based, despite the country occupying just 4% of the world's population.

Among them are the wealthiest and most recognisable names, including Microsoft founder Bill Gates, Tesla founder Elon Musk and Amazon founder Jeff Bezos, each a beneficiary of US equities markets. 

During recent downturns, the comeback for the billionaire class has also been much greater than the setback. While US billionaires' total wealth fell by 6% (-$98 billion) between 2000 to 2010 during the great recession, it grew by 160% ($2.57 trillion) between 2010 and March 2021.

However, it would be a disservice to measure the success of US equities markets by focusing solely on billionaires. The country is also home to countless unknown millionaires. Some of these are likely billionaires in the making, or 'America's kids destined to live far better than their parents did' as Buffett put it. 

Keeping perspective – Buffett style

Last Friday, the S&P500 entered a bear market. A place we have been before. 

Since 1929, the S&P 500 has entered a bear market (defined as a decline by 20% or more) 17 times. 

It's very hard to predict the scale or duration of a downturn. The average bear market decline since 1929 has been 38%. The longest lasted 998 days from September 1929 to June 1932, and the shortest just 33 days from February 19, 2020, to March 23, 2020.  

However, history shows that the market has never failed to return to and surpass previous highs. 

That same goose that has laid golden eggs for the past two centuries through war, inflation and elections, is likely to do so in the future, charged by American innovation that has long been the envy of its competitors. Corporations and individuals will likely continue sharing in the successes of American innovation for years to come.

While many focus on short term economic events, Buffett excels at viewing the market through the lens of America's long term economic history. 

"…investors who diversify widely and simply sit tight with their holdings are certain to prosper: In America, gains from winning investments have always far more than offset the losses from clunkers," he once noted.

Buffett accumulated his wealth by being farsighted while others are nearsighted. This is something to keep in mind as we navigate through volatile markets and uncertain times.