The U.S. is experiencing a significant transformation as it increasingly resembles an emerging market. This is characterized by a weak domestic currency and higher inflation, which, while detrimental to those residing in the country, have made the performance of the domestic stock market appear exceptional.
Drawing a comparison, let’s examine the stock market performance in South Africa over the past two decades. At first glance, it may appear unremarkable, as it has been moving sideways since 2010 when priced in US dollars. However, if we reprice South Africa’s stock market in its domestic currency, the Rand, we witness a different story.
Similarly, a comparable dynamic is currently unfolding in the United States. The S&P 500 appears impressively bullish, having rebounded since October 2022. Yet, much of this performance can be attributed to the fact that the index is priced in the US dollar, which has been remarkably weak.
To grasp the full extent of this phenomenon, let’s consider the effect of pricing the S&P 500 in a stronger currency like the Euro. Remarkably, the S&P 500 priced in Euros indicates an essentially sideways trajectory throughout most of 2023, dispelling the notion of its fantastic success.
In essence, a significant factor behind the S&P 500’s recent strong performance is its pricing in US dollars, which have experienced a sharp decline. This trend is emblematic of emerging markets.
For individual investors navigating this evolving market, the traditional framework for investing in the US, which has prevailed from 1940 until now, is no longer applicable. Rather than investing in a developed nation, investors must recognize that they are now operating within an emerging market.
Whilst this tectonic shift presents unprecedented opportunities, it also carries substantial risks. Certain investments have the potential to generate substantial fortunes, while others may result in losses spanning years, if not decades. Success in this new landscape depends on positioning oneself correctly.
Overall, the US transforming into an emerging market signifies a notable development in the financial landscape. Individual investors must adapt and reevaluate their strategies to thrive in this changing environment.
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