There is no clear answer to any of these questions. I have never seen so many potential factors affecting the market happening simultaneously in my entire career. Just because the markets haven’t reflected this yet doesn’t mean they won’t.
By Rana FOROOHAR
For many years I have been amazed – and continue to be amazed – by the way markets ignore the most dramatic political and economic events. Pandemics, wars, the collapse of the global trading system, the rise of right-wing nationalism and left-wing populism – nothing seems to dull investors’ instincts. Many reasons have been given for this: from still-high corporate profits, to the promise of artificial intelligence, to the so-called “Taco” trade. But I would like to propose another reason: the world simply has not yet reached a new economic narrative. Until that happens, we are likely to remain in a period of uncertain market stagnation.
Historically, political economies have tended to be defined by grand, overarching narratives. Eighteenth-century mercantilism gave way to nineteenth-century laissez-faire, which eventually led to Keynesianism, which was then replaced by the Reagan-Thatcher revolution and the neoliberal era.
But today there is no single narrative about where we are or what lies ahead. Instead, there are competing narratives about globalization, inflation, capital markets, politics, and technology. All of this creates a kind of Rashomon effect – the same data and events can be interpreted in opposite ways by different market participants.
We know, for example, that the global trading system is changing. Since 2017, there has been less trade between geopolitically distant partners. Major economies are now “insulating,” as the consulting firm Kearney puts it, focusing on national self-sufficiency rather than global integration.
Yet, as an Asian attendee at a CEO conference I attended two weeks ago told me, it all “happens on a spectrum.” If you’re in the Pacific, “there’s more globalization than ever before, and there’s likely to be more.” According to a recent McKinsey report on the changes in global trade, of today’s 50 largest trade corridors, 16 would grow significantly even with a 10 percent increase in global tariffs and a 60 percent increase in tariffs on China and Russia. These are the new routes connecting emerging economies, from India to the Middle East.
The Rashomon effect is also playing out at the company level. The industry you are in obviously matters a lot. But size matters too. The trade disruption caused by tariffs will simply be another advantage for large companies, because they can mobilize more resources than small ones to mitigate the consequences.
Several CEOs and supply chain experts I’ve spoken to recently say there’s been so much optimism about the post-pandemic supply chain at big companies that many of them will be able to absorb 80 percent or more of the inflationary pressure caused by the tariffs through efficiency gains. But not for other players. JPMorgan says the tariffs imposed by Donald Trump will cost mid-sized American businesses $82 billion, or XNUMX percent of payrolls — which will likely mean staff cuts and tighter profit margins. Meanwhile, economists worry that many small businesses will simply go bankrupt.
If that happens — and it’s something that Regional Federal Reserve officials have begun to watch closely — it would have a disproportionate impact on employment and wealth distribution in rural areas and small towns, which have fewer large employers. This would exacerbate the “geographical star” effect, where urban dwellers who work for large corporations benefit while small business owners and workers in less populated areas do not.
This divide is part of what fuels unstable politics in the US and many other countries. In America, both right-wing and left-wing populism are on the rise. Those who feel oppressed in “red” (Republican) states may vote for MAGA, while young liberals who can’t afford rent in New York City support Zohran Mamdani, a democratic socialist who could become the city’s next mayor. I suspect this narrative will be repeated in the 2028 presidential election, if Democrats choose an economic populist candidate – which they have every reason to do, given that centrists, including Kamala Harris, have failed. But this dynamic opens the door to even more uncertainty about the future of the US.
According to a recent survey by the Deutsche Bank, investors are almost evenly divided on whether they believe in the future of “American exceptionalism.” Forty-four percent are optimistic, believing that, ultimately, no other country can compete with the United States for growth and dynamism, despite recent events. But 49 percent think that America’s position in the world will slowly erode in the coming years. Seventy-eight percent prefer to hold the euro over the dollar over the next year, even though the ratio is 50/50 over a five-year period.
As if all this uncertainty weren’t enough, we also have artificial intelligence to consider. Will it boost productivity, keeping profits and stock prices high? Or will it quickly replace many jobs, causing higher unemployment and an even stronger populist backlash? Or neither? Which countries and companies will emerge as winners? Will we be able to afford the cost of energy and water?
There is no clear answer to any of these questions. I have never seen so many potential factors affecting the market happening simultaneously in my entire career. Just because the markets haven’t reflected this yet doesn’t mean they won’t. (The Financial Times)