My mentor used to describe the retail stock market (that is Mum and Dad investors), as walking down to the ocean with a bucket and attempting to take as much water as you can. It doesn’t matter how many times you empty the bucket and refill it, the ocean isn’t going to be affected by your efforts. This is the enormity of the global stock market.
According to the World Bank, companies listed on the US Stock market were valued at $18.66 trillion USD in 2012 (latest data)[i]. It takes the next 8 global stock exchanges to accumulate the same value as the US, including China, Japan, United Kingdom, Canada, France, Germany, Australia, and India. Australia is ranked as the 8th largest stock market at $1.28 trillion USD.
In addition to this, the global derivatives market is worth $77.85 trillion USD (Futures and Options), turning over $480.42 trillion USD (Futures and Options) in the 3rd quarter of 2014[ii]. North America (primarily the US), comprises $51.51 trillion USD of value with 3rd quarter 2014 turnover at $314.37 trillion USD. That’s approximately 65% of the global derivatives market represented by the United States.
Let’s just put that into perspective. The United States annual GDP (Gross Domestic Product) is currently $16.8 trillion USD. That is, the US stock market is worth more than what the entire country turns over, and the futures and options derivatives market is 4 and a half times GDP. The Euro region GDP, in comparison, is $12.75 trillion USD, while China is $9.24 trillion.
Stock Market Dynamics
Each country’s stock market has a different dynamic. Australia, for example, is heavily reliant on Resources (Mining) and the Banks. The US is defined by Institutional Finance, Consumer Spending and Global Technology. The UK is defined by Finance, Germany by Manufacturing, Japan by Technology and Manufacturing and so on. These are the key sectors that drive that particular economy.
The size of the US stock market value is enormous. It is the central hub to all global activity. When the US stock market sneezes, the rest of the world catches a cold. It has that much of an influence on global markets.
But technology has made it ever so easy to participate in the stock markets. Whether you are investing large sums, or looking to short-term trade with small funds. The cost of trading has decreased sharply in recent years, and accessibility is not just limited to computers but to mobile devices.
The greatest fear is economic Debt
Doom and Gloomers will discount the US stock market due to the enormous amount of debt that the country has accumulated. Current Government debt to GDP is at a whopping 101.53%. It has been steadily rising since an all time low of 31.7% in 1974, although tapering out in the last few years.
Recent news headlines have included Greece and that country’s ability to pay back its debt. Currently its Government Debt to GDP is at 174.90%. Higher still is Japan at 227.2%.
But the US is trumped by countries that you wouldn’t have considered. Singapore has a Government debt to GDP at 105.5%. The last time I was in Singapore, the country didn’t look like it was in financial trouble!
Since the Global Financial Crisis (GFC) in 2007/08, the Reserve Bank of America has adopted Austerity measures to pump liquidity into the economy. Without printing more money, this has helped avoid a debt crisis such that Greece, Italy, Portugal and Spain have endured in recent years. But that debt must be paid back at some point.
The Doom and Gloomers…
The Doom and Gloomers are touting that there will be an Armageddon of stock market crashes due to the increasing debt that is accumulating. But if you compare the US debt levels to Japan, the Eurozone, and other highly developed nations, it is not exceptionally abnormal.
Although we may experience a fall in the stock market at some time in 2015, the broader economy is not contracting at the same rate. In fact, expectations are for a continued growth of 3 to 4% GDP in 2015. And that has the potential to add a further 8 to 10% on the stock market.
At Australian Investment Education (AIE), we provide education on how to analyse the markets. This includes both Australian and US. While there are different governing bodies, stocks are analysed and evaluated in the same way.
We have upcoming events where we discuss our approach to the markets. If you would like to learn more about investing in the US, come along to Brisbane (23rd Feb), Sydney (24th Feb), Melbourne (25th Feb), or Perth (26th Feb). Attendance is by registration only. To book your seat, CLICK HERE to register.