Rethinking exceptionalism in the US

There is economic exceptionalism; meaning an economy performs better than others, and there is financial market exceptionalism, where a country’s assets such as stocks and its currency outperform others. The former does not guarantee the latter. Lots of countries, especially in the developing world, have faster economic growth than the US, but don’t have better stock market performance or stronger currencies.

One way to think about this conundrum is to consider just how this economic exceptionalism arises. Many analysts have little doubt that the US will recover to become economically exceptional again, but that might not go hand in hand with financial market outperformance given how this exceptionalism is likely to be generated.

In short, achieving economic exceptionalism from here will increasingly depend on policies that are far more contentious than those in the past. The likes of tariffs, political pressure on the Fed, and fiscal largesse are all contentious in their own right and could drive a wedge between economic performance and financial market performance. We might see the US economy outgrow others, but its stock market and currency fall relative to peers. If we start with tariffs. These are clearly an attempt to promote growth vs others. Of course, policymakers in the US and around the world have always tried to boost growth, but this is mostly through competitive means, such as being more efficient in the production process.

Undoubtedly, some methods have been used as well, like state subsidies and currency devaluation, but President Trump’s tariffs lift foreign growth to a whole new level. Fiscal largesse is another kind to boost growth. But this is a kind of growth from the future because more consumption today, through tax cuts, means less consumption down the road, unless you happen to believe in crackpot theories like the Laffer curve, which purport that tax cuts pay for themselves out of the faster growth they generate. Political pressure on the Fed to lower rates is another type of promoting growth should it lead to a rise in unanticipated inflation. 

However, the key question is whether investors will make US assets exceptional again because they turn an eye to the contentious way in which this exceptionalism is being achieved? Steven Barrow, Head of Standard Bank G10 Strategy doesn’t know the answer to this, but a clue may come from the way in which asset prices have performed in recent months, once the mayhem around the ‘liberation day’ tariffs passed. For what we have seen is a strong rebound in equities and what seems to be a strong rebound in foreign demand for US stocks and bonds, judging by the Treasury’s data and private surveys. But what we have not seen is a strong rebound in the US dollar. This may mean that global investors have been willing to look through the more contentious aspects of US policymaking, like tariffs and political pressure on the Fed, when it comes to stocks, but not the US dollar, as more seem keen to hedge their currency exposures.

“We appeared to see a sharp rise in hedge ratios when asset markets were falling apart in the spring, and perhaps this caution continues. If it does, exceptionalism may imply bifurcation as stocks hold firm but the US dollar does not”, said Steven Barrow.