The US Stock Market’s major indices are on a tear. Today the S&P500 – dominated by the magnificent seven tech behemoths – broke its record high for the 57th time this year.
Growth is around 30% year-to-date and the enthusiasm amongst investors for the second Trump presidency is bubbling around at euphoric levels. As the holidays approach, there is also an expectation for another ‘Santa Rally’ as shops and online retailers benefit from a feelgood bounce and, with key fundamentals indicating a strong underlying economy, those with a bit of cash are piling into stocks pushing prices even higher in ‘fear of missing out’ … FOMO.
An example, once again, of American exceptionalism? What could possibly go wrong?
The stock market is not simply the preserve of professional Wall St. types and institutional money managers anymore. Now, your grandparents, siblings and offspring are all sinking their hard earned into self-managed pensions, stocks, and retail brokerage accounts to make their fortunes and fund their retirement. Bar room talk is as much about stock prices as it is about your fantasy football team or sports book betting accounts. Everyone has a tip or a trade they recommend.
But there are challenges ahead which even the most skilful market player will have to take into consideration. Some are economic, some political and others about human nature.
While 57 record highs in 2024 is more than one a week, you’d be wrong in thinking this was a steady, uniform and predictable rise. There was a number of times in 2024 the market retreated, but the strong Bull Market absorbed the dip and came roaring back.
But those economic downturns could return. And stick.
Last year economic growth was only predicted to be an anaemic 1% but expectations this year are more than double that. If businesses can’t live up to this expectation, then it may signal that the steam is coming out of the upward trajectory and trigger traders to cut and run with their profits.
FOMO when getting into the market is one risk, but missing the call to get out may be even more significant. It is often said markets go up on the escalator but descend in an elevator – vertically. Those who don’t catch the signal early may wake up to see their nest has been brutally raided.
And if confidence is damaged and this time the bull doesn’t roar back, there are worries the economy may do as it did in the 80s – and in Japan for nearly 30 years – just shuffle along sideways with no real gains.
The discussion around the economic forecasts is also at the macro level – watching the Federal Bank for dovish or hawkish indicators, how the global bond markets react, and what that means for US interest rates and inflation.
There is also a heightened concern about the national debt and the deficit. The debt is the total amount the federal government has borrowed – currently running at $36 trillion – while the deficit is the negative gap between spending and income – currently $1.8trillion a year.
Jerome Powell, the Chair of The Federal Reserve, spoke yesterday about how he sees the US on an ‘unsustainable path’ and called for a course correction.
He told reporters: “We don’t need to pay the debt down. We don’t need to balance the budget. We just need the economy to grow faster than the debt – and that’s not happening.”
Earlier in the year, Powell had issued similar warnings and suggested it was time to have ‘an adult conversation’ about getting the government back on an even fiscal track.
But that isn’t his job – it is the job of Congress and the President and its questionable about how many adults are in the room.
Worth remembering that the 47th President was elected on a populist manifesto of high tariffs, big tax cuts, mass deportations and slashing federal programs through the new Department of Government Efficiency run by his best buddies Elon Musk and Vivek Ramaswamy.
Powell is too sharp to comment directly on the politics of the White House or Congress, but there is little doubt he would not see these policies as a road map back to that path of fiscal sustainability.
And what candidates say on the campaign trail isn’t always what they deliver in office – shock, horror! – Trump has doubled down on his pledges saying 25% tariffs on Mexico and Canada will be put in place on Day 1.
It is unclear if Trump and his advisers see tariffs as part of a broader foreign policy play, designed to broker more favourable deals and conditions on issues like immigration and drug policy, or rather as part of a domestic agenda for industrialisation and re-shoring jobs.
But if tariffs are applied, there will likely be a response from Europe, China, Latin America and beyond. Any tariffs on US products and services, not just those made in USA but made by US companies like Apple, Microsoft, Tesla, Coke, McDonalds and the like would clobber earnings for the magnificent seven and beyond.
One other thing is for sure though, if those tariffs are imposed on day one it will be a very long time before any or all those jobs making cheap products overseas return to America, if at all.
The reality now is that in many of the nations which Trump is accusing of ‘taking American jobs’, those jobs are now fully automated as China, Mexico, India and elsewhere have invested in, AI, robotics technology and manufacturing systems to replace cheap labour.
What Powell will acknowledge is that any tariffs raised on day one will simply be passed on to the consumer, putting the price of everything up, nudging inflation on food prices, raw materials for our manufacturers, denting supply chains and making an Amazon shop or a trawl through Walmart.com pricier, rather than filling the Treasury’s coffers.
So, with tariffs not likely to add to the government’s income, what other ways are available to raise funds? The most obvious is tax.
But again, Trump pledged to extend the tax cuts he had introduced in his previous term which are scheduled to expire next year. If those tax cuts are extended, economists warn that the cost to the deficit would be $4 trillion over a decade. I think Congress will extend the tax cuts – they are individual income tax cuts so it’s a vote winner – but the cost of that is the money will have to be saved somewhere else. That’s Elon and Vivek’s job.
But not so fast, fellas. If you look at the US Federal Budget, there is very little discretionary spending to snip away at. The big buckets are defense, social security and the fastest growing spend is on interest payments for the deficit. The boys at DOGE will find that cutting programs which Congress has already approved, or slashing jobs in government departments is much more difficult than firing a bunch of your employees as Musk did at Tesla and X.
And worse for Elon and Vivek is that while they have the President’s ear, they have no real power or authority. DOGE isn’t even a proper department and has no legal standing. While they have been vocal about cutting what they see as ‘unelected bureaucrats extending regulatory powers’ over things they don’t like, those departments and agencies like the Environmental Protection Agency, Securities and Exchange Commission and Commodity Futures Trading Commission are all created by and managed by Congress.
So, with Animal Spirits pumping, galloping stock valuations getting frothy, the deficit spiralling, inflation and austerity returning, what else could go wrong? Well, why not sink your fortune into something no-one knows how to regulate or what risk and volatility looks like – crypto!
And while Bitcoin broke through the $100K barrier this week – making it look like the most grown up of the altcoins – we also saw the great American public sink $500million dollars this week into the Hawk Tuah girl Hailey Welch’s meme coin only for it to crash within 20 minutes amid allegations of ‘pump and dump’.
The stock market is looking more like a casino than ever. When to twist and when to fold is the question many should ask.
But with crypto meme-coins doing a roaring trade based on a TikTok sensation, many US investors, especially those who aren’t sure what they are doing and are responsive to endless YouTube and social media snake oil, big losses are probably looming.
