It may take a while but the stock market will eventually catch up with the bond market in figuring out the implications of de-globalization.
The thunderclap of the Trump election drowned out the noise of what was already happening: slowing trade growth and a dwindling benefit from a more tightly knit global economy.
So while bond investors have grasped the inflationary implications of Trump’s tax-cut-and-spend plans, stocks have mostly fastened onto the undeniable boost they’d bring to corporate profits.
That’s fueled a rally in stocks, in contrast to the sharp sell-off in bonds. What comes later is a reckoning with the longer-lasting impact not just of restraints on trade Trump may impose, but of a widespread trend toward more inward-focused economic policy globally.
“The breed of populism spreading across the world today seems defined in particular by an increasingly inward focus, at the expense of trade and immigration,” wrote Eric Lascelles, Eric Savoie and Daniel Chornous of RBC Global Asset Management in a note to clients.
“Global trade is already in slight decline. Less trade and immigration can be economically damaging. Populism is also associated with higher inflation as cheaper foreign goods (and lower-paid immigrants) are replaced by more expensive domestic substitutes.”
While you could argue with the conflation of “populism” with de-globalization, there can be little doubt that the brands of government evinced by Trump in the United States and implied by the Brexit vote will tend to suppress the flow of goods and people internationally.
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What is unarguable is the slowing growth of trade. The World Trade Organization is forecasting trade growth of just 1.8 percent in 2017, exactly half its forecast from April. That’s little more than half the International Monetary Fund’s 2017 global output estimate. In recent decades, as China and the rest of the world became more closely integrated, trade growth has tended to run at about 150 percent of overall economic output. Trade growing more slowly than GDP will eventually prove a drag on overall growth, especially when compounded with the impact of high debt levels.
“The sluggish growth of 2012-2014 and the magnitude of the decline in trade of goods and services in 2015 suggest a change in the dynamics behind the international integration process,” the United Nations Conference on Trade and Development said in a report last week. “Indeed, the most commonly used index to gauge globalization trends — the ratio of the value of world trade over global GDP — indicates a decline in economic interdependence.”
Whereas, according to the IMF, globalization added about a tenth of a percent to global growth annually between 1995 and 2008. That’s dwindled to nothing since, and going forward, that particular set of wheels will be grinding in reverse.
DEATH BY CHINA?
Remember that all of these trends were forming headwinds before we’ve seen any impact from policies of a Trump presidency, the withdrawal of Britain from the European Union or the potential for further elections next year of inward-looking leaders, particularly in Europe.
Trump has appointed economist Peter Navarro, director of a movie called “Death by China: How America lost its Manufacturing Base” to head a newly created White House Trade Council. Navarro, along with investor Wilbur Ross, last year called China the “biggest trade cheater in the world.” The two will spearhead Trump administration trade policy, and the signs are that the barriers to U.S. trade, at least, will be rising.
That won’t have a bigger impact in 2017 than corporate tax cuts or foreign cash repatriation holidays, but it will be longer-lasting and probably more profound over time. At some point, perhaps as early as the second half of next year, stock market investors may begin to discount this.
“Globally accessible markets are very important to most businesses because they mean companies are less reliant on consumers or markets in their domestic area and have much broader prospects,” Sinead Colton, head of investment strategy at Mellon Capital, told investors. “With greater restrictions and, therefore, fewer opportunities, logic dictates that companies in aggregate would be less profitable, which would likely result in lower investment and lower growth overall.”
While the higher wages that less immigration may bring will have economic benefits, they won’t, as a rule, be enjoyed by corporations, which will take a hit to their operating costs. Investment managers benchmarked against indices and quarterly numbers are not, as a general rule, incentivized to get out in front of these types of longer-running trends, and they duly have reached for the shiny bauble since the election.
But next year de-globalization will begin to be felt more directly, and markets will not enjoy the sensation.