The US continues to dominate the world stock markets

Not only has the capitalization of global market exchanges changed, but the attitude of traders/investors has also changed.

As the reflation/recovery trade kicked in and global central banks continued their efforts to support recovery efforts after COVID-19, it appears that the focus of capital was initially paid out fairly evenly across multiple global exchanges. Traders and investors seemed to believe that opportunities existed in almost all global market indices and exchanges. Still, it seems that something has changed as the world approached the September/October 2020 time frame. Suddenly, capital began to shift from growth expectations to hedging and risk-off assets. Then, in November/December 2020, global traders and investors turned their attention back to US equities, technology, healthcare and other sectors. The new focus made for an incredible rally phase that lasted until 2021.

In this article, we’re going to explore this shift in how traders/investors see opportunities, and why the past 7+ months may have caused a global shift away from sustained rally expectations as we head into the second half of 2021.

The US continues to dominate the global focus on investing

Let’s first look at current global (world) stock market capitalization levels and try to get some insight into how global markets have shifted over the past 12+ months.

This chart shows how the US stock market continues to dominate the global market and how it compares as a driver of global prosperity and economic stability. In comparison, the US stock market is nearly 10x to 12x larger than the average of the second largest 5 or 6 global foreign stock exchanges.

By comparison, there is no comparable global economic growth to the US in terms of market capitalization, wealth creation and/or a single source/focus of global dynamics. In short, the US stock market and economics continue to dominate the world in relation to how money is used for investment and in relation to future expectations for opportunities. Global traders make a statement with their own money that they believe that the american economy, stock market, and its capabilities far exceed the ability of other countries to create wealth and opportunity.

(Source: https://www.statista.com/statistics/710680/global-stock-markets-by-country/)

Global stock market capitalization continues to rise

This next chart, even though the data ends in 2019, suggests that global stock markets are continuing to grow in aggregate market capitalization at rates far exceeding the 2000 and 2008 market peaks. As the US Fed and global central banks have poured more capital into the markets, traders and investors have continued to search for the best environment for the best returns and the best security. I believe that the US stock market and economy has clearly moved ahead of all other global markets and that global traders and investors continue to pump capital into US dollar-denominated stock exchanges.

This dynamic has really strengthened over the past 4+ years as emerging markets, foreign markets and global traders have continued to search for the safest and most secure investments in the world. The end result is that no other global stock market and/or investment environment beats the US stock market and economy.

Since this chart ends in 2019, I’ve drawn a MAGENTA line that my team and I believe represents the increase in global stock market capitalization in 2020 and through 2021. Current global stock market capitalization, which may reflect 55% to 60% of US stock market dominance, suggests global capitalization may be 85% to 110% higher than the 2007-08 peak (the housing crisis peak). This suggests that global leverage and risk exposure could be 200% to 300% higher than at any time in recent history. In short, global market risks are likely to be 2x to 3x higher than at any time in the past 75+ years.

(Source: https://data.worldbank.org/indicator/CM.MKT.LCAP.CD)

US dominates top 10 world stock markets

This recent list of the Top 10 World Stock Exchanges, showing market cap, clearly shows that the US continues to dominate. This clearly shows that the US economy, stock market and consumer market are driving global economic activity. No matter how you try to break up the data, the US economy and stock market continues to outpace the closest global stock markets by more than 3x to 5x total capitalization levels.

Combined, the New York Stock Exchange (NYSE) and the NASADAQ totaling more than $45 trillion. In comparison, a combination of the exchanges ranked 3~10 totaling $39.64 trillion US dollars. That’s a pretty big comparison when you consider that the total of the Shanghai Stock Exchange, Japan Exchange Group, Hong Kong Stock Exchange, Euronext, Shenzen Stock Exchange, London Stock Exchange, Toronto Stock Exchange and India National Stock Exchange (which represent more than the total world population), corresponds to only 87.6% of the market capitalization of the US NYSE and NASDAQ.

The world has decided that the US stock market, economy, consumer engagement and corporations are the driving force behind almost all global economic activity and wealth creation anywhere in the world. Nothing even comes close to total capitalization and potential for wealth creation and opportunity like the US.

(Source: https://www.advratings.com/companies/the-largest-stock-exchanges)

In Part II of this article, examine closely how the dynamics of the US indices versus the global market shows how this divergence in market capitalization could lead to very large trends over the next 2+ years. Also shows how vulnerable certain exchanges in foreign markets can be to broad market rotation events over the next 5+ years.

Simply put, the rotations of the past 20+ years in the US stock market and the actions of the US Federal Reserve have strengthened the position of the US consumer, the economy, valuations and future expectations. If broad market rotation/reversion were to occur again, we believe the disruption in capital flows and creation will further fuel the shift to the US stock market and economy. Leaving many foreign exchanges in very dangerous market capitalization and liquidity positions.

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Have a nice day!

For a look at all of today’s economic events, check out our economic calendar.

Chris Vermeulen
Chief Market Strategist
www.TheTechnicalTraders.com