By William Meisel, Ph.D
A year ago, I wrote a blog entry that raised this question: “Is the U.S. stock market the new gold standard?”
In brief, I argued that the value of the dollar, the world’s reserve currency, is defined by the collective value of U.S. stocks. The U.S. stock market, despite its volatility, defines the value of a dollar by relating it to the value of U.S. companies.
So, might investing in the U.S. stock market be today’s equivalent of a “retreat to gold,” which in the past served as a haven in times of uncertainty?
Here’s what I said in that August 2014 blog entry: “The stock market has many advantages over gold. It represents real assets that generate returns, unlike gold, most of which simply sits in vaults.
“It can grow in value to match the growth of the economy, so that it can grow as the economy legitimately needs a larger money supply. The stock market is not a perfect representation of the U.S. economy in that it is largely driven by corporate profits rather than the growth in Gross Domestic Product (GDP).
“However, stock valuations may reflect the overall economy indirectly, as investors try to factor in the prospects for the future growth or decline in profits, reflected in a changing average price-to-earnings (P/E) ratio.”
I reiterated my position in a December 2014 entry headlined, “The U.S. stock market: Good as gold?” I wrote: “The U.S. stock market is benefiting from bad news worldwide as a refuge for money that wants a relatively safe haven. And, despite the occasional chaos of a democratic political system, the rule of law in the U.S. seems intact, at least to the extent that arbitrary government actions outside of those rules are difficult.
“That critical factor, combined with regulations requiring uniform financial disclosure for companies listed on the U.S. stock market, has made that institution one where values of companies are based on relatively reliable information.”
Does this mean that the U.S. stock market, as a relatively safe haven, should go up when there is economic turmoil worldwide? It’s obvious that the stock market is volatile, and in part reflects emotional responses to the day’s news. But it has an intrinsic value that indirectly reflects the dependable rule of law in the U.S. compared to many developing countries.
About William Meisel
William Meisel is an industry analyst covering the commercial uses of speech and language-understanding technology. Meisel’s latest book, “Technically Dead,” is a novel that takes place in a near future, as predicted by his 2013 non-fiction book, “The Software Society: Cultural and Economic Impact.” Meisel blogs on related topics at www.thesoftwaresociety.com. He writes a monthly paid-subscription industry newsletter, Speech Strategy News, and organizes the annual Mobile Voice Conference in his role as executive director of the Applied Voice Input Output Society. Meisel has a Bachelor of Science degree in engineering from Caltech and a Ph.D. in electrical engineering from the University of Southern California. He began his career as a professor of electrical engineering and computer science at USC and published the first technical book on “machine learning” (“Computer-Oriented Approaches to Pattern Recognition,” Academic Press). He has 10 patents, ran the computer science division of a defense company, and founded and ran a company developing speech-recognition technology for a decade.