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The best performing stock market in the world? It might not be what you think

MarketWatch logo MarketWatch 1/10/2022 Brett Arends
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Quick: Which stock market is doing better, the U.S.A. or Japan?

Video: Stock Market: 2021 Year in Review (Yahoo! Finance)

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If you said U.S.A., you’d be right.

But if you said Japan, you would be, sort of, too.

Japanese companies have raised sales, earnings, net assets and dividends much faster than American companies over the past 10 years, reports John Thorndike, co-head of asset allocation at Boston-based white shoe money manager GMO in his latest report. “Japanese companies have outperformed American companies” in terms of their fundamentals, he writes.

As measured by GMO, the companies on the Tokyo stock market have generated underlying business gains of 5.4% a year, way ahead of the 4.8% average in the U.S. Or, to put it another way, in a decade their overall sales, earnings, assets and dividends have grown about 69% in a decade, a full 10 percentage points more than those in the U.S. 

But you wouldn’t know it if you read the headlines.

Nor, indeed, to look at the performance figures from your 401(k), IRA or other investment account.

Last year, once again, you made the big money on your U.S. stock funds. The SPDR S&P 500 ETF Trust  gave you a 29% return on your money, including reinvested dividends, and the Invesco QQQ (Nasdaq) Trust 27% Meanwhile the Vanguard FTSE Developed Markets ETF of international stocks earned just 11% and the Vanguard FTSE All-World ex-USA ETF just 8%. (Indeed the iShares MSCI Japan ETF gained just 1%). And this trend has been going on for a decade.

The reason, argues Thorndike, is simple and it constitutes a trap for regular investors. Yes, U.S. stocks and stock funds have been doing well, he admits, but it’s not for reasons investors may imagine. It’s not because the underlying companies have been doing so well. It’s simply because the stocks have become much more expensive in relation to the underlying businesses. It’s a price effect.

Actually, in terms of fundamentals, GMO calculates, U.S. companies haven’t done any better in the past decade than they did in the previous one, when the stocks went nowhere. (Strip out the five giants of Apple Amazon Google Microsoft and Facebook GMO adds, and the performance of U.S.A., Inc. looks even worse.)

So the price of the S&P 500 has risen more than twice as much over 10 years as the price of the Nikkei 225 (when quoted in dollars) — even though the Japanese companies have done better.

As a result, investors who invest today in U.S. stock mutual funds are paying about 50% more for each dollar of business value than investors who put their money into, say, Japanese stocks, GMO estimates.

And the price gap is even greater when you look at European stocks or emerging markets, GMO argues. Compared with their underlying business values, U.S. stocks are about twice as expensive as emerging markets stocks, the firm estimates.

Thorndike’s analysis follows one last year by hedge-fund manager and widely followed investment guru Cliff Asness, who reached a similar conclusion.

Naturally this may sound academic to the average saver, who looks at their 401(k) and IRA statements and sees how much money they actually made. But it might not be as moot as it sounds.

Sooner or later, goes the theory, stock prices will end up following the underlying values of businesses. 

If history or math are any guide, it’s another reason to be more cautious about all the money we’re making from our U.S. stock funds, and not to be too gloomy about the money we haven’t been making, yet, from our “international” funds.  


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