Will U.S. Exceptionalism Persist?

Jeffrey Roach (00:00):

Hi, I'm Jeffrey Roach, Chief Economist for LPL Financial, and in this latest edition of the Street View podcast, I want to give investors an important consideration when thinking about the why and the how of U.S. exceptionalism.

Jeffrey Roach (00:13):

Despite recent shifts, including trade policies, inflation concerns, and geopolitical tension, which led some to question whether U.S. exceptionalism will persist, I think the U.S. will continue to maintain its unique role in global markets for a variety of reasons. First, let's digest one structural reason this country is unique. I'm showing a chart here of the biggest stock exchanges in the world and how they rank as a percentage of global market capitalization. Of course, exchanges are the backbone of global financial markets, facilitating the buying and selling of securities. The New York Stock Exchange leads the world with a market cap of approximately 32 trillion as of today, followed closely by the Nasdaq, which specializes in technology stocks, and also has a market cap over 30 trillion. It's quite a gap going down to the third largest, which is the Shanghai Stock Exchange with 7 trillion. So, to put this in perspective, the market cap of Microsoft and Apple together have a market cap larger than the biggest exchange outside this country.

Jeffrey Roach (01:20):

The breadth and depth of U.S. markets helps explain why U.S. exceptionalism will persist. Now. Second, the U.S. dollar remains the world's primary reserve currency, reinforcing demand for American assets. Take a look at this second chart. Since the Bretton Woods agreement of 1944, the dollar has been the primary currency for global trade and financial transactions with roughly 60% of global foreign exchange reserves held in U.S. dollars. This dominance allows the U.S. to borrow at lower interest rates and maintain economic influence worldwide. However, recent trends indicate a gradual diversification among central banks, with increasing allocations to non-traditional reserve currencies, such as the Chinese yuan, the Canadian dollar, and gold. But with diversification comes risks, especially liquidity risks. The U.S. dollar market is quite deep, giving global investors comfort that there will always be others willing to take the other side of the trade. While the dollar remains the most trusted currency, geopolitical risks and economic fragmentation do continue to challenge its supremacy. So there were my two main reasons U.S. exceptionalism will remain, at least for now, the depth and breadth of U.S. capital markets and the liquidity of the U.S. reserve currency status provides unique structural advantages. Well, that's all for now, but please continue to follow us on social media for up-to-date analysis on the investment landscape.