bull market = strong economy?
Does stock market strength always mean a booming economy?
The short answer is no.
Mexico in the 1980s
The best illustration I can think of is Mexico in the 1980s. That economy was a disaster, which played out first of all in the currency markets, where the peso lost 98% of its value vs. the US$ during that decade. Despite this, in US$ terms the Mexican stock market was hands down the best in the world over the period, far outpacing the S&P 500.
…a domestic form of capital flight is the short story.
An incompetent and corrupt government in Mexico was spending much more than it was taking in in taxes but was loathe to raise interest rates to defend the peso. Fearing currency depreciation triggered by excessive debt, citizens began transferring massive amounts of money abroad, converting their pesos mostly into US$ and either buying property or depositing in a bank. This added to downward pressure on the peso. In September 1982 the government instituted capital controls to stem the outflow–basically making it illegal for citizens to convert their pesos into other currencies (Texas, which had been a big beneficiary of the money flow into the US, will remember the negative effect stemming it had).
With that door closed, Mexican savers turned to the national stock market as a way to preserve their wealth. They avoided domestic-oriented companies that had revenues in pesos. They especially shunned any with costs in dollars. They focused instead on gold and silver mines or locally-listed industrial companies that had substantial earnings and assets outside Mexico. The ideal situation was a multinational firm with revenues in dollars and costs in pesos.
today in the US
To be clear, I don’t think we’re anything close to 1980s Mexico. But it trying to explain to myself what’s behind the huge divergence in performance between companies wedded to the US economy (bad) and multinational tech (good) I keep coming back to the Mexico experience. Why?
I don’t see the US economic situation as especially rosy. Evidently, the stock market doesn’t either. In tone, administration economic policy looks to me like a reprise of Donald Trump’s disastrous foray into Atlantic City gambling–where he made money personally but where the supporters who financed and trusted him lost their shirts.
What catches my eye:
–tariff and immigration actions are suppressing current growth and discouraging US and foreign firms from building new plant and equipment here
–strong support of fossil fuels plus the roadblocks the administration is trying to create against renewables will likely make domestic companies non-starters in a post-carbon world outside the US. Look at what similar “protection” did to Detroit’s business in the 1980s.
–threats to deny Chinese companies access to US financial markets and/or the US banking system are accelerating Beijing’s plans to create a digital renminbi alternative to the dollar
–the administration’s denial of access to US-made computer components by Chinese companies will spur creation of a competing business in China–the same way the tariff wars have already opened the door to Brazil in the soybean market, permanently damaging US farmers
–not a permanent issue but one that implies lack of planning: isn’t it weird to create large tax-cut stimulus but then until it wears off to launch a trade war that will cause contraction?
Then there are Trump’s intangibles–his white racism, his sadism, his constant 1984-ish prevarication, his disdain for honest civil servants, his orange face paint, the simulacrum he appears to inhabit much of the time, the influence of Vladimir Putin… None of these can be positives, either for stocks or for the country, even though it may not be clear how to quantify them. (A saving grace may be that the EU can’t seem to get its act together and both China and the UK appear to be governed by Trump clones.)
Two of them:
1.If you were thinking all this, how would you invest your money?
Unlike the case with 1980s Mexico, there’s no foreign stock market destination that’s clearly better. China through Hong Kong would be my first thought, except that Xi Jinping’s heavy-handed attempt to violate the 1984 handover treaty has deeply damaged the SAR. So we’re probably limited to US-traded equities.
What to buy?
–that are structural change beneficiaries
–whose main attraction is intellectual property, the rights to which are held outside the US,
–with minimum physical plant and equipment owned inside the US, and
–building new operating infrastructure outside the US, say, across the border in Canada.
As I see it, this is pretty much what’s going on.
2.What happens if Mr. Trump is not reelected?
A lot depends on who may take his place. But it could well mean that we return to a more “normal” economy, where the population increases, so too economic growth, corporate investment in the US resumes, domestic bricks-and-mortar firms do better–and some of the air comes out of the software companies’ stocks.