US Market Mania Reaches New Heights amid a New Era of "American Exceptionalism" in Markets
While the US is often criticised as a dysfunctional superpower politically and diplomatically, its financial markets are riding an unprecedented wave of optimism. Investors globally are pouring more capital into the US than ever before, with US stocks accounting for nearly 70% of the leading global stock index—up from just 30% in the 1980s. This outsized focus on US markets highlights the belief in their resilience and dominance, particularly in technology and innovation.
Signs of a Market Bubble
While the US’s economic and corporate strengths are undeniable, many argue this belief has turned into a global market bubble. A bubble, after all, is often a good idea taken too far.
Key indicators of this bubble include:
- Overvaluation of US Stocks: Prices have surged to levels not seen since the dotcom era, but the premium of US markets over the rest of the world is far higher today.
- Currency Strength: The US dollar trades at its highest value in decades, adding further strain on global markets.
- Investor Mania: From Mumbai to Singapore, wealth managers are urging clients to invest in US giants, particularly tech companies like Nvidia, reflecting global infatuation with American markets.
The Role of Policy and Politics
The resurgence of Donald Trump as US President has further fuelled investor enthusiasm. His plans to:
- Raise tariffs,
- Lower taxes, and
- Cut regulations,
are seen as policies that will inflate US markets even further.
In November, following Trump’s election victory, US markets posted their strongest month of outperformance yet, drawing even more global capital.
Global Consequences of US Dominance
Historically, a rising US market lifted other markets, as seen during the Roaring 1920s and the dotcom era. Today, the US market acts as a magnet, pulling capital away from smaller markets. This creates a zero-sum game where:
- Smaller Economies Suffer: Outflows from emerging and smaller markets weaken their currencies, force central banks to raise interest rates, and slow economic growth.
- Global Imbalances Deepen: With 70% of capital in private markets flowing into the US, other regions struggle to compete.
What Happens If the Bubble Bursts?
While it is difficult to predict when or how the US market bubble will deflate, the potential consequences for the global economy are significant:
- Severe Market Correction: A sudden drop in US market values would ripple through global financial systems, eroding wealth and destabilising markets.
- Currency Volatility: A weaker US dollar could hurt economies reliant on dollar-denominated trade and debt.
- Emerging Markets Crisis: Countries already grappling with economic challenges could face further instability, compounded by capital outflows and rising interest rates.
Concluding Thought: The current fixation on US markets underscores a dangerous imbalance in the global financial ecosystem. If the "mother of all bubbles" bursts, it may not only challenge America's economic dominance but could also push the world into a broader financial crisis. Investors and policymakers must weigh the risks of over-reliance on a single market and foster a more balanced global economic environment.
Source: (FT.com,)
