Socialism > Capitalism?

There has been a lot of buzz about whether the United States will become a “socialist” country under the leadership of the Obama administration.  Newsweek magazine even put forth this very idea in their February 16, 2009 issue with an article entitled “We Are All Socialists Now.”

As strong believers in the long-term success of Capitalism, we have begun to wonder about the effects of increased government intervention in the private sector, as well as its effect on the stock markets in the United States.  Something very interesting emerges when we compare the returns of the stock markets of “developed” countries around the globe.  Most of those listed would be considered as having more of a ”social-leaning agenda” than that of the United States.

Annualized Return - January 1, 1999 - December 31, 2008 (10 Years)

Canada                          8.97%

Australia                       8.36%

Norway                         8.25%

Denmark                      6.82%

Singapore                     6.48%

Spain                            5.04%

Hong Kong                   4.34%

New Zealand                3.62%

Sweden                        3.29%

Austria                         3.21%

Finland                         2.55%

France                          2.36%

Switzerland                   2.10%

Germany                      1.42%

Japan                           0.58%

Italy                              -0.36%

Netherlands                  -0.93%

Portugal                        -1.05%

United Kingdom           -1.05%

USA                            -1.67%

Greece                         -2.13%

Belgium                        -5.69%

Ireland                          -9.47%

Do these numbers mean that a move to a more “socialist” economic policy would increase the returns of the American stock markets?  Absolutely not.  There are two reasons why the numbers are the way they are…the first is Reversion to the mean and the second one is Risk.

Reversion to the mean is basically a return to average.  The American stock market has averaged roughly 9.5% per year since the mid-1920s.  The American stock market in the 1980s averaged 17.55% per year and just over 18% per year during the 1990s.  From a statistical standpoint, the fact that the American stock market has averaged -1.67% over the last decade is just a “reversion to the mean,” or simply, a return to the average.

Investors are compensated by the risk that they are willing to take on.  Risk is actually perceived. And the common perception is that investments in other “developed” countries carry more risk, and therefore, provide greater return because risk and return are related.

“The degree of government intervention is just one of many factors affecting expected stock returns, and investors should be cautious in assuming it is the principal factor.” (Weston Wellington, VP, Dimensional Fund Advisors)

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