I have marvelled over the past few years, and continue to marvel, at how markets shrug off the most dramatic political and economic events. Pandemics, wars, the toppling of the global trade system, the rise of rightwing nationalism and leftwing populism — nothing seems to derail investors’ animal spirits.
Many reasons have been given for this, from still high corporate earnings to the promise of artificial intelligence, to the so-called Taco trade. But I’d like to propose another: the world simply hasn’t settled on a new economic narrative. Until it does, we are likely to linger in a period of uneasy market stasis.
Historically, political economies tend to be defined by big, sweeping narratives. Eighteenth-century mercantilism gave way to 19th-century laissez-faire, which eventually created Keynesianism, which in turn gave way to the Reagan-Thatcher revolution and the neoliberal era.
But today there is no single narrative about where we are, or what comes next. Instead, there are multiple competing ones around globalisation, inflation, capital markets, politics and technology. All this creates a kind of Rashomon effect — the same data and events can be interpreted in contradictory ways by different market participants.
We know, for example, that the global trading system is in flux. Since 2017, there has been less trade between geopolitically remote partners. Major economies are now “islandising”, as consulting firm Kearney puts it, focusing on national self-sufficiency rather than global integration.
Yet, as one Asian participant at a CEO conference I attended two weeks ago told me, all this is “happening on a spectrum”. If you sit in the Pacific, “there is more globalisation than before and likely to be more still”.
According to a recent McKinsey report on changing global trade, of today’s 50 largest trade corridors, 16 would grow strongly even amid a 10 per cent rise in global tariffs and a 60 per cent increase on tariffs to China and Russia. These are the new pathways that link emerging economies from India to the Middle East together.
The Rashomon effect is playing out at the company level too. Which industry you are in obviously matters hugely. But size is important, as well. Trade disruption caused by tariffs will be just another tailwind for big companies, because they can deploy more resources than smaller ones to mitigate the adverse effects.
Several CEOs and supply chain experts I’ve spoken to recently say that there has been so much post-pandemic supply chain optimisation in large companies that many will be able to buffer 80 per cent or more of tariff-related inflationary pressure with increased efficiency.
Not so for other players. JPMorgan says Donald Trump’s tariffs will cost mid-sized US businesses $82bn, or 3 per cent of their payroll, which will probably mean lay-offs and tighter margins. Meanwhile, economists worry that many small businesses will simply go under.
If that happens — and it’s something regional Federal Reserve officials are beginning to track — it would in turn have a disproportionate impact on employment and wealth distribution in rural areas and smaller cities, which have fewer large employers. That would exacerbate the geographic superstar effect in which urbanites working for large companies do well, while small business owners and workers in less populated areas do not.
That divide is part of what fuels the volatile politics of the US and many other countries. In America right now, both right- and leftwing populism is growing. Those under pressure in red-state America might vote Maga, while young liberals who can’t afford rent in the Big Apple support Zohran Mamdani, a democratic socialist who may become New York’s next mayor.
I suspect that this narrative will be replicated in the 2028 presidential elections if the Democrats end up choosing an economic populist as their candidate — something they have every reason to do given how centrists, including Kamala Harris, have failed. But this dynamic opens the door to yet more uncertainty about the future of the US.
As a recent Deutsche Bank survey captured, investors are nearly evenly split on whether they believe in the future of American exceptionalism, or not. Forty-four per cent were bullish, believing that, ultimately, no other country could compete on growth and dynamism, despite recent events. But 49 per cent thought America’s position in the world would slowly erode over the coming years. Seventy-eight per cent preferred to hold the euro to the dollar over the next year, though the ratio was 50/50 over five years.
As if all this weren’t uncertainty enough, there’s AI to consider too. Will the technology boost productivity, keeping earnings and stock prices high? Will it displace too many jobs too quickly, leading to higher unemployment and further populist backlash? Or neither? Which countries and companies will win out? Can we even afford the energy and water costs?
There is no clear answer to any of these issues. I’ve never seen as many potentially market-moving vectors simultaneously in play at any point during my career. The fact that the markets aren’t reflecting that yet doesn’t mean they won’t.
rana.foroohar@ft.com
