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In the max-woke era it was fun to rile the worshippers of climate-related finance risk. One of my favourite prods was a chart plotting the frequency of words used in the media such as “apocalypse” or “tipping point” against equity prices.
The greater our awareness of impending climate catastrophe, the more risk assets rose. Higher returns and eternal doom were coupled. I wasn’t claiming causation. Rather that there were only three possible explanations for this perverse relationship.
One, that climate risk was immaterial to share prices — or at least less important than economic growth, earnings, demographics and technology. Another was that the risk was already discounted. Reducing emissions would be even more bullish for stocks in that case.
The final reason equities seemed to rise in the face of Armageddon is because investors were simply naive to the danger ahead. Tree-huggers used to believe this — and still do. One day a tsunami will short-circuit the New York Stock Exchange, you’ll see!
For what it’s worth, option one always seemed the most likely to me — not a popular view back then. I was pondering this recently when I realised those old charts of mine could be adapted for a similar conundrum today. As with global warming five years ago, widespread fear has been building throughout President Donald Trump’s second term. Yet equities the world over are at or near their peaks.
Like breaching 1.5C, Trump’s aggressive tariffs will eventually slow economic growth, according to almost everyone. Meanwhile, global anxiety over US extrajudicial strikes, threats to Nato and pressure on the Federal Reserve has risen exponentially.
Markets are supposed to hate uncertainty. And there can hardly be anything more uncertain than Trump going after foreign oil reserves one week and domestic credit card issuers the next. The reaction, though? Equity and bond “fear gauges” such as the Vix and Move indices are asleep. On the other hand, American, European, Japanese and emerging share prices are dancing ever higher.
Judging by the hundreds of emails I have received, this contradiction has investors in a proper muddle. Some finance pundits are clueless too. Nothing Trump does seems to damp animal spirits. Even gold, the exception that proves the rule, has a party-like feel to it these days.
So let’s apply the same logic as for climate risk and markets. Again, there can only be three explanations for Trumpian recklessness and share prices to rise in tandem. Which one you believe to be correct should dictate your investment strategy for the next few years — and arguably longer.
Akin to my view on the impact of climate change on a broadly diversified portfolio, maybe Trumpandemonium makes no difference to stock returns, short-term volatility aside. I’ve written before that equities have historically performed better during large-scale wars. Likewise, tariffs are taken in stride.
Trump would not like this explanation, no doubt. Then again, trillion-dollar markets are hard for anyone to influence — even presidents and central bankers.
Less fatalistic is the second possibility, that the White House’s stomping on the old world order is reflected in equity prices already. As someone who vibes with efficient markets, this idea appeals to me as well. After all, Trump hogs the news agenda like no other leader ever has. Which investor doesn’t know what is happening? Surely the mayhem is all discounted.
This option is also inherently bullish. If stocks have incorporated a higher cost of capital due to Trump risk, when he leaves office — or if he moderates his behaviour in the roughly 1,100 days he has left — valuations should move higher.
Where does that leave the final explanation? That investors are simply deluding themselves when it comes to Trump’s idiosyncratic policies and actions? Markets are wrongly priced, in other words, and a nasty reckoning is inevitable.
If there wasn’t concurrently a bubble in US stocks I would usually dismiss this explanation, as I did for climate risk. But it seems possible to me that our frothing over the boundless upside of AI has rendered us incapable of seeing the downside of anything. Trump included.
Clearly this is the most bearish of the three explanations. That my portfolio is 100 per cent cash tells you why I think shares keep rising despite Trump’s shock-and-awe approach. If you’re in camp one, however, holding equities is fine. Those who reckon Mar-a-Lago is in the price might even think of buying more.