Suddenly, the US bull market isn’t looking so great

Stock prices have been a powerful support for the Make America Great Again agenda because the US market is so big as to be the tail wagging the dog
Close attention must be paid to the recent market stumble and America’s slowing GDP growth – where US stock prices go, so goes the global economy

Anthony Rowley

Published: 4:30pm, 4 May 2024

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The Maga (Make America Great Again) vision of both former US president Donald Trump and his successor Joe Biden has been supported by a seemingly strong and job-generating US economy and, critically, by a fast-motoring stock market. But the vision is running out of road.

What’s more, this is happening at a time when the image of China – the world’s second-largest economy – as a hobbled giant is undergoing a positive reappraisal, which has implications for the global balance of economic power.

Not that markets – obsessed as they are with short-term movements in interest rates and currencies, notably the US federal funds rate and the level of the dollar – seem to be really aware of what’s going on.

I am not alone in this view. My former Far Eastern Economic Review colleague Christopher Wood (now the global head of equity strategy at investment bank Jefferies) observed in a note to clients that the financial media continue to focus on the “endless chatter” around the US Federal Reserve.

Yet this pales into insignificance compared with the “tectonic shifts” happening in geopolitics. Financial markets, Wood suggested, are useless when it comes to discounting such shifts – until, that is, they become impossible to ignore.

I cannot but agree and, even within a more restricted framework of reference, many analysts have been found wanting lately on economics and financial developments.

They declared that the most recent bout of inflation would be “transitory”, which it wasn’t. And they suggested that consequent interest rate rises would be short-lived, which they weren’t.

Now, they are speculating that rates will stay higher for longer, which they almost certainly won’t. In any case, it matters little in the broader scheme of things compared to where stock markets and capital flows go from here.

Stock prices have been a powerful support for the Maga vision (or illusion) because the US market is so big as to be the tail that is wagging the proverbial dog. It is the great enabler fuelling the consumption-driven US economy.

This often overlooked fact is worth recalling at a time when the market has become so big in relation to the world’s largest economy, and when the quality and composition of some listings could be questioned.

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The New York Stock Exchange and Nasdaq are jointly capitalised at around US$50 trillion as of last year. Astonishingly, this is equal to more than 170 per cent of US gross domestic product.

The leveraging potential of this massive money machine for US consumption of imported and domestically produced goods and services is vast, not to mention the boost to spending and investment created by the wealth effect from stock prices.

Markets need to watch what is happening to US stock indices with the same laserlike intensity they have been devoting to the fluctuations of inflation and interest rates. Where US stock prices go, there too goes the global economy.

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If – or more likely when – the stock market stumble turns into a continuing slide and when the slowing US GDP growth seen in the first quarter of 2024 becomes a trend rather than a slip, the Biden administration might reach for fiscal and monetary stimulus levers, Fed objections notwithstanding.

This is, after all, a presidential election year and keeping the US economy moving forward will be a priority for a Biden administration which is locked in a race for survival. White House pressure on the Fed to cut rates will be stepped up, let inflation go hang.

At that point King Dollar could see his throne undermined if not yet usurped, with the yen in particular gaining strength by comparison, along with other Asian currencies. This, in turn, is likely to trigger major shifts of capital out of the dollar and away from the US generally – another blow to the Maga saga.

Stocks prices in general can be expected to turn volatile at that point, although with the size of markets outside the US much smaller in relation to GDP (for example, China’s market capitalisation is about 60 per cent of GDP, according to CEIC Data), the impact on economies other than the US will be more muted.

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Recent readings of the US market have not been encouraging. After reaching all-time highs in March, prices retreated in April and have generally been giving an appearance of wobbliness. They have a “stale bull market” look to them.

This has thrown commentators back to their obsession with interest rates and inflation instead of directing their attention to faltering US GDP growth and nervousness over the tech-dominated nature of the stock market.

To go back to the comments of Wood, he noted that both in Ukraine and the Middle East, tensions are likely to continue escalating. Couple this with the prospect of a US economic slowdown and a likely stabilising of China’s economy, and you have the makings of what I would call an interesting situation. It will be a choppy year, to put it mildly.

Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs