Trump’s America is outperforming the world as the economy and financial markets buck slowdown trend
Nicholas Spiro says the buoyancy of the US economy and stock market, amid declines in other countries, is likely to continue for a while, though trade tensions remain a risk
The technology-heavy Nasdaq Composite index dropped by more than 2 per cent, its sharpest one-day fall since early April. Even the VIX Index, Wall Street’s “fear gauge”, which measures the anticipated volatility in the benchmark S&P 500 index, shot up to its highest level since late April, having stood close to its record low for the last month.
Since the start of this year, US equities have delivered the best returns across the major asset classes, fuelled by the strongest corporate earnings since 2011. The Nasdaq Composite has risen by nearly 8 per cent, while the Russell 2000, an index of small-cap stocks which generate most of their revenues in the US, is up by 7 per cent.
What is more, America’s corporate debt market is proving remarkably resilient. Spreads, or the risk premium, on US high-yield, or “junk”, bonds have fallen since the beginning of this year, despite the surge in volatility and a hawkish tilt from the Fed. In a report published last Friday, JPMorgan described US junk bonds as “the most resilient part of the global credit complex”.
Make no mistake, Trump’s America, whose protectionist policies are now the main source of anxiety in markets, is outperforming the rest of the global economy and proving much less vulnerable to the recent tightening in financial conditions.
Yet, how much longer can US “exceptionalism” last?
Possibly for some time. While “the dark side of Trumponomics”, as JPMorgan calls it, has become much more pronounced this year, counteracting domestic and external forces are holding sway. Not only have Trump’s trillion-dollar tax cuts boosted corporate earnings and engendered optimism on Main Street, America’s economy is gaining momentum just when other parts of the world, notably Europe, are slowing, increasing the relative appeal of US assets.
The US also continues to benefit from its tech-heavy stock markets, with the sector currently accounting for a quarter of the S&P 500. In Europe, on the other hand, tech firms make up less than 5 per cent of the Stoxx Europe 600 index, the region’s main equity gauge.
Yet the survey also reveals that a trade war has become the biggest “tail risk” for markets. US exceptionalism may not be so exceptional after all.
Nicholas Spiro is a partner at Lauressa Advisory