March 09, 2009
The Road to Serfdom?

A recent Newsweek cover story proclaimed "We Are All Socialists Now" and observed, "whether we want to admit it or not, America of 2009 is moving toward a European state. . . . As entitlement spending rises over the next decade, we will become even more French."1

Newsweek does not clarify their definition of "socialist" or what it means to be "more French"; but for discussion purposes, let us assume that, in the years ahead, government intervention in the US economy assumes a greater role than in the past. What are the implications for investors in US equities?

Based on global equity market results over the past ten years, perhaps very little. Among the 23 developed countries with ten years of MSCI data, the US ranked 20th in US dollar terms, with an annualized return of -1.67%. When results are computed in local currency, the US ranking improves a bit, to 17th. Either way, US stock returns over this period compare unfavorably with countries often characterized by greater government intervention in business affairs.

Were these results an aberration? Using the 39-year period ending in 2008 (the limit of MSCI data) produces a similar overall result: The US ranks 15th among 18 countries in US dollar terms. Sweden ranked 2nd, with a total return of 11,034%, compared to 2,921% in the US.

We are not suggesting that policymakers can enhance US equity returns by implementing a 57% maximum income tax rate, a 25% national sales tax, and mandating a minimum of five weeks of annual vacation for all employees. It seems plausible to us that such an approach, although perhaps politically popular, would likely bring about higher unemployment and weaker economic growth. Researchers have found that high rates of employment and GDP growth offer no assurance of high stock market returns, just as low rates of employment and GDP growth do not predict low stock market returns.2 If market prices reflect the expected results of government policies, investors are not necessarily disadvantaged.

Weston J. Wellington
Vice President, Dimensional Fund Advisors

1. Jon Meacham and Evan Thomas, "We Are All Socialists Now," Newsweek, February 16, 2009.
2. Jim Davis, Economic Growth and Emerging Market Returns, Purely Academic, August 2006.

 

 

Comment from Dennis Gogarty,
President of Raffa Wealth Management

Financial media outlets fill a critical role for information and news.  In a society that requires buyers to ‘beware’ these media sources are often relied upon to inform decision making.  The information delivered by many in the media can do more to elicit strong emotional reactions than to educate and inform.  Such emotions tend to inhibit sound decision making – particularly when it comes to money. Clearly there are many sources of reliable and helpful information.  My word of caution is simply not to let emotions guide decision making.  If a story you read or hear makes you feel like the sky is falling or that you deserve to have more for less - consider if it’s your emotions or your intellect responding.  I hate to rain on the parade but let’s think calmly and rationally before we pronounce capitalism dead. 

 

• Now Available

• Three keys to successful Socially Conscious Investing:

• 

• • Broad market diversification
  • Efficient market exposure
  • Consistency with your core values

• Let us show you how to start customizing a Socially Conscious Investment program that’s right for you.

• Click here for brochure

• Click here to download a Socially Responsible Investment policy questionnaire

2009 Raffa Inc, all rights reserved | Home | Contact