Investors shouldn’t bet against America

OPINION:

The early months of President Trump’s second term have tested investors’ nerves.

Mr. Trump inherited an economy growing at 2.8% annually and a stock market that delivered blockbuster gains in 2023 and 2024.

It seemed that American exceptionalism, the belief that the U.S. equities are the ideal place to invest, had become a touchstone globally for individual savers and institutional asset managers.

Then a roller-coaster ride of tariff announcements and a Republican-led Congress displaying an inadequate appetite to curb historically large federal deficits combined to slow growth, elevate interest rates and raise questions about the continued international dominance of the dollar.

Ordinary folks planning for college expenses and retirement basically have two sets of decisions to make: U.S. vs. foreign stocks and fixed-income vs. equity investments.

Over the long haul, the U.S. economy is not going off a cliff.

Tariffs will slow things somewhat, and a recession remains possible. However, governments in China, Japan, Britain, France and Italy also are carrying large debt, and every region has problems.

Japan is in a demographic downdraft, with a birth rate of 1.2 per woman and nearly 30% of its population older than 65.

China is suffering from a property bubble and has an economic development strategy that must change or stall.

Since the end of 2022, China’s exports have been up 33% while imports have flatlined. Its factories have too much capacity and face growing resistance in foreign markets to accepting more of what they make.

Challenged to create enough domestic demand to sustain growth, its expansion must slow.

New investor interest in Europe is driven by a defense buildup, which aims to raise core spending on troops and arms above U.S. levels to 3.5% of gross domestic product.

However, Europeans will borrow too much because their governing coalitions won’t ask voters to scale back generous social programs to make budget space for defense.

Along with those other government financing needs, a debt-driven rearming will require European central banks to pursue much more accommodating monetary policies and accept more inflation. Otherwise, ballooning government borrowing will crowd out private investment.

More fundamentally, Europe lacks a competitive technology sector to rival America’s Magnificent 7 — Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla — and Broadcom. The latter recently replaced the automaker to become the seventh-largest U.S. company by market value.

These companies and their domestic and Chinese rivals are investing heavily in artificial intelligence and other technologies that should boost productivity and incomes. The Europeans are largely nonparticipants.

None of the top 10 companies investing in quantum computing is European.

Over the past 50 years, the United States has created 241 companies with market capitalizations exceeding $10 billion, whereas Europe has created just 14.

This is not surprising because the European pool of venture capital is one-fifth as large as ours.

It may be prudent to bet more broadly than just on U.S. stocks, but that should be viewed as rebalancing your portfolio rather than a radical shift out of U.S. equities and into foreign stocks.

Regarding the trade-off between fixed-income investments and equities, a wholesale shift out of stocks would likely doom the ordinary investor to unacceptably low inflation-adjusted returns.

Mr. Trump’s crackdown on immigration will create labor shortages and boost wages, and his tariffs will compel rearranged supply chains that lower productivity and raise costs.

Mr. Trump likely will replace Jerome Powell with an uber-dovish Federal Reserve chairman.

Consequently, inflation will be closer to 3% than 2%, and nominal interest rates are unlikely to drift much higher.

In this context, the 10-year Treasury yield of about 4.5% is hardly high, and the real return on fixed-income assets is likely to be 2% or less.

Taking money out of stocks to ride out all the turbulence created by Mr. Trump’s erratic policy pronouncements is an exercise in market timing.

Sooner or later, equity markets will become inured and just push forward. Guessing when that will happen is a fool’s journey.

Until you are within 10 years of retirement, my best advice is to keep enough of your portfolio in fixed-income assets to accommodate emergencies such as unemployment and put the rest into stocks.

Unless you need more ready cash, distribute 25% into fixed-income assets, 60% into domestic stocks and 15% into foreign equities.

If it seems difficult to know which domestic stocks to choose, picking foreign stocks only multiplies the complexities and risks. Everything you can’t foresee in domestic markets is many times larger abroad, unless your work affords you deep insight into a specific foreign sector.

If you index your domestic equities, it makes even more sense to do the same with your foreign holdings.

Buy an S&P 500 fund like those offered by Vanguard, USAA and others and an international index that excludes U.S. stocks like the Vanguard Total International Index Fund.

• Peter Morici is an economist, an emeritus business professor at the University of Maryland and a national columnist.