What stock index is best? S&P 500 top since 2008 crash, DAX and Nikkei next

This is part one of a series on the performance of stock market indexes across the world. This piece will focus on a high-level overall view, while the ensuing reports will be more detailed into the performance of each respective index/country, and what the future holds for each nation/region. If you have any feedback or requests for simulated portfolios/ models/ analysis, please feel free to reach out.

I have published quite a bit of analysis on the power of long-term investing.

Most recently, this took the form of a piece last week analysing the performance of a simulated portfolio started right at the market peak.

But that piece looked at the US stock market. Given the US is the biggest economy in the world, not to mention the fact that the US dollar is the global reserve currency (an answer to why that is true here, btw), a massive proportion of financial research and media comes is US-focused.

But regarding stock market indexes, has it been the best place to invest? Let’s dive into how the US has done compared to other countries over the last 14 years – the post Great Financial Crash period – and whether investors have made the right decision if they just blindly bought an S&P 500 index fund.

US stock market has performed better than any other

The short answer is yeah, the US has been a tour de force over the last 15 years.

I plotted the returns of major stock market indexes on the below chart since January 2009. This more or less coincides with the nadir of the financial crisis (within a few months, at least).

The chart shows how well the S&P 500 has done. Germany’s DAX and Japan’s Nikkei place second and third, respectively, but it’s not all that close.

Since 2018, the US has really separated from the crowd, and we will look into this period past in detail shortly. Firstly, however, let me present the above results in a more coherent manner, given that prior chart looks like a four-year-old’s colouring book.

The below presents the returns of each respective index from January 2009 until today (April 2023), a time period spanning over 14 years.

Why have US stocks been better?

Therefore, the S&P 500 has streaked clear of the field since the Great Financial Crisis in 2008. Let’s dig into why and when this occurred, because there is a lesson in here that investors can use.

The temptation is to look at the first chart in this piece and declare that the S&P 500 hasonly really diverged in the last few years. But that is not really the case. In fact, this is a demonstration of the power of compound investing and how small differences add up over time.

While the chart above shows the gap between the US and other nations’ indexes mushrooming since COVID, the below are the returns over the pandemic period (starting from January 2020, with COVID fears striking markets in March 2020). The US are on top, but it it is very tight.

But this sample starts in 2020, 11 years into the earlier sample (starting in 2009), where the S&P 500 was already clear of the field.

So, it shows how small differences are compounded over time, like a Formula One car lapping at 0.1 seconds quicker each lap – over an entire race, that is a substantial gap.

Presenting the returns on their own, we can see that the S&P 500 is up 27% currently compared to its value at the start of 2020, with the CAC 40 (France), Nikkei 225 (Japan) and S&P TSX (Canada) all above 20% too.

Not far off a photo finish in isolation, but the gap from first to second between 2009 and 2023 is 358% (S&P 500) vs 226% (DAX, which is fifth on the below chart in the pandemic period).

Or to illustrate the point differently again, below are the average annual returns over the 14-year sample.

The S&P 500 is in first place with an average return of 11.28%. That is 2.64% clear of Germany’s DAX index in second. And that 2.64% explains the chasm between the S&P 500’s 358% return and the DAX’s 226% return.

So it may seem a relatively small amount, but when you compound small amounts in the long run, they become not-so-small. That is why things like fees and other costs – slippage, custody, etc – are also so important.

What is driving the US lead?

We have assessed the US’ lead and how it has compounded over time, but we have not discussed why.

It is a nuanced question, and a full essay could be written on this alone. But straight off the bat, one of the most glaring factors is tech.

US tech companies have exploded post-GFC, printing absolutely outrageous gains as our world has embraced the Silicon Valley revolution. And while the last year of tight monetary policy has crushed tech, with the low-profit (or none at all) business model built on thin discount rates and the promise of an elusive future profit, the pullback is a drop in the ocean compared to the gains that came before.

The best way to present this is to look at the tech-heavy Nasdaq index. Many stocks within it are also contained in the S&P 500. Take a look at the chart at the top of this piece comparing index performances when the Nasdaq is layered in:

This has really been the tech revolution. The world’s first iPhone was released in 2007. Facebook launched in 2004. Amazon, Netflix, Google and all these other tech companies have been the story of the last 15 years.

One way to surmise this: the Nasdaq multiplied 12.7X between March 2009 and its peak in November 2021, as basement-level interest rates, a warm money printer and the silicon valley boom combined to form an absolutely perfect environment for tech stocks.

While there are a million other factors contributing to the US stock market dominance, the nation has been able to leverage the meteoric growth of technology tremendously, and these massive tech stocks have sent US investors laughing to the bank over the last 14 years.

While 2022 proved a nasty year as tech finally fell back (and hard!), if you zoom out and maintain a long-term view, the sector has unquestionably been the number one success story.

And no other country has been able to keep up.