Why Does American Exceptionalism Matter for Investors?

Hello and welcome to this month’s market update for December 2024. My name is Steve Latham, and I am the Chief Investment Officer for Bernicke Wealth Management. This month’s theme is going to be around American exceptionalism as it specifically relates to our economy and the markets.

What is American Exceptionalism?

What do I mean by that? Well, when we’re looking at how the markets and the economy have fared on a global basis, the United States has really been a step above many other developed countries, not only for the past year, but really going back for the last five, ten, and even 20 years, depending upon how you measure that exceptionalism.

Measuring U.S. Economic Strength

What we want to dive into today is how we get to that concept and what we are measuring in order to determine why we would want to be in the United States stock markets and exposed to our economy relative to other economies.

The Role of Currencies in Global Markets

One of the first things you need to consider whenever you’re talking about markets on a global basis is the currencies with which they use in order to transact in their local economies.

Performance of the U.S. Dollar

The first slide that I have in front of us here is the performance of the United States dollar relative to other currencies on the global developed markets stage. What we can see since going back to September 26 of this year is that the dollar has strengthened quite considerably relative to other developed nations’ currencies. The euro has fallen almost 7% in the last two months relative to the United States dollar.

Why is the Dollar Appreciating?

Why is that? Well, if you’re going to be purchasing more goods and services from the United States because policies are being enacted within our country that suggest we want to manufacture and produce more goods and services, you need to buy United States dollars in order to purchase those goods and services. So, if I’m sitting in Europe and I want to purchase something from the United States, I have to sell my euros in order to buy United States dollars and purchase those goods from our country.

That is why you have been seeing the United States dollar rally and appreciate relative to other developed nations’ currencies.

Long-Term Trends of the U.S. Dollar

Now, if we take a step back and look at this on a longer time scale, going back ten years, we can see that the dollar has traded in pretty specific ranges over that period of time. Going back to 2022, we’ve seen that the dollar has traded within a relatively tight range, with the exception of late 2022, when it really spiked above that range. And right now, we’re at the peak of that range again.

Of course, since the election, we’ve seen the dollar really appreciate relative to those other currencies. But in order to anticipate where we think the dollar is going to go from here, we would need to see further appreciation of the dollar relative to that basket of currencies.

Future Outlook for the Dollar

So yes, there is this trend currently underway that more countries are buying our dollar in anticipation of needing to purchase more goods and services from us, but we haven’t seen an extended breakout of that range for the United States dollar just yet to confirm what we could see over the next two to four years.

Impact on Manufacturing and the PMI

Now, moving along, how does that really interpret in local countries relative to the United States from a manufacturing standpoint?

Again, if we’re thinking that other countries are going to be purchasing more goods and services from our country, that means we’re likely going to be manufacturing and making more goods and services. One of the ways that you can measure that is through something called a Purchasing Managers Index. And that’s what we have here in front of us today.

What is the Purchasing Managers Index (PMI)?

The Purchasing Managers Index, or the PMI, is effectively a survey that is given to different companies and manufacturers across each nation and actually asks them, what do the price of goods look like? What do your inventories look like? What is the sentiment around your business? And whenever you get those surveys back, you can put a number to them.

The index that we see here in front of us is something called a diffusion index. It basically means that if your numbers are above 50, that means things are looking good and they are expanding, and if they fall below 50, that means that things are starting to look a little negative, and our outlook is less than optimistic.

Comparing PMI in the U.S. and Eurozone

What we can see here with the chart in front of us is the orange line, which represents the United States PMI index, and the blue line, which represents the index for the eurozone. Going back to 2021, they’ve been relatively in lockstep with one another—that is, until around midway through this year, when the United States continued along a positive path, and that index remained above the 54 level range, which indicates a positive expected outlook going forward. Meanwhile, the eurozone started to fall back.

What that means is that, in order to anticipate where those markets are going to go for the eurozone, the manufacturers are basically telling you that things aren’t looking as good as what we had expected in years past. With the diffusion index, or the PMI, falling below 50, that tells you that there’s some economic hardship potentially on the horizon, at least as far as manufacturers are concerned. That gets interpreted into our markets by buying and selling individual stocks.

Stock Market Performance: U.S. vs. Eurozone

Looking at the stock markets of both the eurozone and the United States, we can see how the markets have fared as a result of many factors, one of which is the Purchasing Managers Index.

Divergence in Performance

Going back to about the middle of July 2024, we can see that the United States, represented by the S&P 500 in the purple line, stayed in relative lockstep with the eurozone, represented by the orange line, up until around October of this year. At that time, the two lines diverged quite significantly.

Part of this is because of the American exceptionalism theme, suggesting that more manufacturing is going to be re-domesticated and occur within the United States. Additionally, the outlook for the eurozone became much more negative—not only because of the PMI index but because of their inability to grow economically across the entire eurozone bloc. This has been reflected in the stock markets for both the United States and the eurozone.

The United States has obviously been doing very well throughout the entire year, but certainly so over the last couple of months, while the eurozone has fallen quite significantly since its peak in the middle of October.

Keeping a Global Perspective

The reason why we bring this up is that we do want to keep an eye on not only what’s happening in the domestic markets for the United States but also what is happening globally to see if there are opportunities to potentially invest further in the international developed markets. Right now, we’ve been keeping a relatively cautious outlook on those international markets, and we continue to do so for a variety of reasons.

As it stands today, the expectation is that moving forward, the United States is going to be experiencing more growth economically domestically as opposed to bringing it in from foreign countries. We’re seeing that play out in both stock markets, not only domestically but internationally as well.

Conclusion

If there’s any question on our outlook for the U.S. markets, for international markets, or really anything else in general, please feel free to reach out to us. We’re always happy to answer them for you. Thank you.