An unlikely mix of populism and conservatism has abruptly shaken up financial markets.
For decades, globalization and free trade supported companies and boosted stock prices. After the 2008 crisis, slow growth and inflation led central banks to inject record amounts of stimulus into markets. This created a “new normal” for traders, where the direction of trading was controlled by expectations of monetary policy. In sum, it was boring.
In just a few months, that’s all changed. The Brexit vote and Donald Trump’s election have made traders expect a surge in spending. Throwing skepticism to the winds, they’ve poured money into stocks, sending the S&P 500 and Nasdaq to record highs, while dumping safer government bonds ($1 trillion in the week after the US election).
But this is irrational. The politicians promising this spending spree are right-wingers, better known for strict adherence to tight budgets. And Trump’s plans to double US economic growth don’t square with the global rollback in free trade that he seems to want.
Right now the stock rally is mostly benefitting American markets at the expense of export-dependent markets in Asia. How long that disconnect can continue is unclear. And bank shares are soaring on Trump’s promise of regulatory cuts, but leniency for the creators of the financial crisis won’t enthrall voters.
The conflict between the populist majorities in the US and UK and the conservatism of the governing elites will at some point come to a head. This week’s UK budget statement hinted at that, showing that the rhetoric of an economy “for everyone” cannot be met by action.
In reality, Brexit will worsen the living standards of the poorest, and further aggrieve many people who voted for it. In the US, Trump is fighting(paywall) to stop companies moving jobs to Mexico. If he fails, he could lose some of his support even before his term begins.