The Wall Street consensus, at least right now and as I read it, is that there will be a considerable slowdown in domestic economic growth as a result of the oddball ( my description, although I wouldn’t argue with lunatic) economic policies of the Trump administration. Tariffs are the most visible, of these, although shrinking the workforce by deporting immigrants may end up being more consequential. Real growth will be cut in half in Wall Street’s view, from around +2% to around +1%. No recession in sight, however.
To my mind, this diagnosis has two implications:
–a stock selloff from the lofty heights achieved in the final two years of the Biden administration, as economically harmful policies are put in their place. Arguably (but I’m almost always too optimistic/early), we’re pretty much past the realization that this is happening. And,
–an investor move away from stocks heavily dependent on the course of the US economy. This can happen in two ways: buying stocks in foreign markets; and/or buying US-listed stocks, but ones where the bulk of their business is outside the US. We’re seeing both.
Both moves involve risk, however.
—The former means entering arenas where the rules of the game may be superficially similar to the US but nevertheless deeply different in the way things proceed on the field. Kind of like trying to play checkers when everyone else is playing Go. The second has the issue that the US portion of the overall business will likely suffer. Kind of like going to Texas and thinking you’re not going to get the measles.
—One way of seeing the potential risk in the second, owning US-listed stocks, is comparison with the past few decades in China.
When Xi replaced Deng, he perceived his mission to be to return to the principles of Mao, and away from the Western-style capitalism (“Socialism with Chinese Characteristics”) Deng had favored. That would restore the dominance of the Communist Party, something that, pre-Deng, had been the guiding principle in Chinese politics since the end of WWII. This switch resulted in what a neutral observer would have expected: a gigantic economic trainwreck, one similar to the one Deng faced when he took power–and so bad that to stop the bleeding Xi has been forced to relegitimize the Deng-era entrepreneurs he had earlier arrested or exiled.
On this template, the US would stand at the beginning of our own Xi era, with the domestic goal being the restoration of an idealized version of nineteenth-century capitalism. Unlike the case in China, however, this is something the majority of Americans have voted for in the recent presidential election. The big imponderable in having exposure to the US market is how long it will take the electorate to figure this out and vote for something different.