Why Do US Stocks Outperform EM and EAFE Regions?

Abstract

The article "Why Do US Stocks Outperform EM and EAFE Regions?" from Quantpedia explores the reasons behind the historical outperformance of US stocks compared to emerging markets (EM) and developed markets (DM) outside of the United States. The article highlights several factors that contribute to this phenomenon, including:

Productivity: The US is home to many highly productive companies with solid returns on capital. These companies generate higher profits and, consequently, higher returns for investors.
Market Size and Liquidity: The US stock market is the most significant and liquid in the world, with a wide variety of stocks. This liquidity makes it easier for investors to buy and sell stocks, which can lead to more efficient pricing and better returns.

Political and Regulatory Stability: The US has a stable political and regulatory environment, providing investors with confidence and reducing risk. This stability can attract more investment to the US market, further boosting returns.

Currency Strength: The US dollar is the world’s reserve currency, giving it stability and attractiveness to investors. This can make US stocks more attractive to international investors, contributing to their outperformance.

Market Cycle: The performance of US stocks tends to follow a cyclical pattern, with periods of outperformance followed by periods of underperformance. Various factors influence these cycles, including economic conditions, interest rates, and investor sentiment.

Keywords: country picking, FX anomaly, market timing, momentum, own-research, reversal, rotational system