Since the surprise victory of Trump and the Republicans on November 5, a significant divergence has emerged in global stock market performance. US stocks have experienced a dramatic increase, gaining approximately $1.8 trillion in market value, while emerging markets have suffered a substantial decline, losing around $500 billion. Similarly, the EAFE (Europe, Australasia, and the Far East) index has seen a depreciation of about $600 billion. This stark contrast illustrates that the only beneficiaries of this electoral outcome have been US markets, as highlighted by Michael Hartnett in his recent flow show. According to Hartnett, investor sentiment has overwhelmingly tilted toward the belief in “Trump 2.0” and US exceptionalism, leaving few options for investors looking to predict a downturn in US asset prices.
Hartnett’s analysis suggests that the current bullish sentiment surrounding US stocks is becoming increasingly precarious. With the real effective exchange rate of the US dollar reaching its highest point in 55 years and US stock valuations relative to global markets at a 75-year peak, Hartnett warns of the inevitable consequences that might follow this era of “US hubris.” He posits that the current market euphoria cannot sustain itself indefinitely and hints at a looming correction. In his latest Flow Show, he emphasizes the importance of shifting investment strategies and suggests a contrarian approach: to sell while confidence is high and prepare for a future downturn, which he describes as the time for “Buy Humiliation.”
This staggering performance gap has highlighted underlying economic disparities and geopolitical tensions. While US markets soar, the declines in emerging markets and other global indices underscore a growing disconnect. Investors are favoring US equities, bolstered by the perception of resilience and growth potential within the American economy. However, this favoritism brings forth risks for global economic stability, as emerging markets struggle under increasing volatility and the impact of US-centric policies. Hartnett’s reflections on the divergence serve as a warning that the current configuration of global markets may be unsustainable, as the health of the US economy is intertwined with global economic health.
Moreover, Hartnett raises further concern regarding the implications of a surging dollar, which historically has not only strengthened asset prices in the US but has also complicated the landscape for international investments. A strong dollar can lead to rising borrowing costs for countries that rely on dollar-denominated debt, particularly in emerging markets. This factor, combined with the stark contrast in market performances between the US and other regions, indicates a precarious balancing act for global allocators. They find themselves in challenging positions with the need to navigate an environment wherein US assets appear to dominate but carry inherent risks that could trigger a significant market correction.
As the prevailing sentiment drives investors to prioritize US stocks, the cautionary message from Hartnett urges a reevaluation of investment strategies. His call to “Sell Hubris” signifies the need to act while confidence in US equities is high. In contrast, “Buy Humiliation” is framed as a strategy to prepare for corrections that may stem from inflated valuations. Hartnett’s insights resonate with historical patterns where periods of unbridled optimism are frequently followed by downturns. Hence, his recommendations encourage investors to be wary of complacency and consider alternative allocations that might better withstand potential market volatility.
In conclusion, the disparate performances of US stocks compared to emerging markets and other global indices mark a critical juncture in the investment landscape. The bullish sentiment surrounding US equities, while currently attractive, is rife with latent risks that may culminate in market corrections. Hartnett’s narrative not only encourages investors to reconsider their positions but suggests that true market stability requires a broad-based approach that encompasses both US potential and global economic health. As the world continues to monitor patterns of investment behavior, an impending shift driven by “US humiliation” could redefine a landscape that currently favors American exceptionalism at the potential detriment of broader economic equilibrium.