For years the U.S. stock market sucked the air out of the world’s markets. At its peak, it accounted for more than half of the world’s publicly-traded capital. But now, money has begun returning home.ANGELA WEISS/AFP/Getty Images
John Rapley is a contributing columnist for The Globe and Mail. He is an author and academic whose books include Why Empires Fall and Twilight of the Money Gods.
Stock markets are probing fresh heights. Among the G7 economies, only Italy’s isn’t in record territory and even Japan, which looked to have entered terminal decline after its 1990 crash, is now back within touching distance of those long-ago highs. House prices as well are near their all-time highs in most places, slightly off their recent peaks but still far above where they ever were before. And that’s nothing compared with crypto and gold – bitcoin is up more than a quarter this year, gold nearly a third.
In short, we’re getting richer by the day. Which is kind of strange, because our economies are barely moving. Of the major economies, only the United States has shown any significant expansion recently and even that is now slowing rapidly. Reflecting this new deceleration, the corporate-earnings season now under way in the United States is turning out to be a dud, with profit growth coming in well below the rate of share-price increases.
In short, the strength of market rallies doesn’t reflect what’s happening in economies, which are weak and getting weaker. So what’s going on?
Some of it is rebalancing. Talk of all-time highs in the U.S. stock market cloud the reality – the U.S. is the laggard, it’s stock market up a mere 5 per cent since President Donald Trump took office and 8 per cent for the year, a far cry from Germany’s 22 per cent or Hong Kong’s 28 per cent. Currency effects make the discrepancy even more dramatic, leaving the U.S. market down in euro and peso terms, and pretty much flat in Canadian dollars.
Lofty U.S. stock valuations bank on tech-heavy market’s earnings strength
For years the U.S. stock market sucked the air out of the world’s markets. At its peak, it accounted for more than half of the world’s publicly traded capital, the Magnificent Seven tech stocks alone having a combined value bigger than any other stock market on the planet. But now, money has begun returning home. That explains the weakening of the dollar. Given how much smaller than the U.S. these markets are, flows of this scale have an outsized impact on prices. As a result, the laggards of the past decade, such as Spain, Hong Kong, South Africa and Britain, have become winners, with a small share of repatriated investment making for big rallies.
This rebalancing was always bound to happen at some point, but Mr. Trump’s policies are accelerating it. Though presenting the trade “deals” he’s now rolling out as wins, because other countries have to “pay” higher tariffs than the U.S., it’s an odd victory when your consumers must pay more for their goods than foreigners. After Mr. Trump announced his trade deal with Japan this week, Toyota’s share price shot up 15 per cent, but Ford’s barely budged. That’s because the price of a Toyota car will increase by 15 per cent, but Ford’s will probably rise more, since the company must pay tariffs on all its inputs.
The same is happening in bond markets, where the spread between U.S. government bonds and those of other countries, especially emerging markets, is narrowing. As the U.S. looks less investable, other countries lure capital back away from it.
To this reallocation of investment one can add the massive amount of stimulus now entering the global pipeline – the tax cuts in Mr. Trump’s Big Beautiful Bill, Germany’s big stimulus program, NATO’s rearmament, Japan’s fiscal loosening: There’s a lot of bond issuance coming, which will pump money into the world economy. The monetary tightening that had followed the 2021-22 inflation spike has now given way to an increase in global money supply that’s running at an annual rate of more than 7 per cent.
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But what’s good for markets isn’t necessarily good for the economy. In the U.S., first-time homebuyers are spending a higher share of their income on mortgage payments today than they were before the 2008 crash, leaving less to spend or invest on other things, while squeezing future demand. The same is happening in Canada, and as we know one consequence of the rising cost of living is that voters are demanding a reduction in immigration. If voters don’t always favour the harsh measures being taken against immigrants in the U.S., nonetheless virtually all Western countries are starting to clamp down on inflows. That is cutting off one of the few remaining sources of growth in Western economies, namely the rise in labour supply.
Sooner or later, in short, markets will realign with the economy. Unless the latter picks up, the former are sure to fall. At the moment, a slowdown looks the more likely scenario. Whatever stimulus effects come from government’s fiscal largesse, the impact of tariffs and slow growth in the labour market owing to immigration cutbacks will drag down growth. Investors are still pricing shares as if the good days will keep rolling. But this fall may bring a chill to markets.