Whatever happens with Trump’s tariffs, investors need to prepare for a new market paradigm

U.S. currency viewed in Manassas, Virgina. Photo by KAREN BLEIERKAREN BLEIER/AFP/Getty Images files

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In 2019, I wrote a column about the coming “dollar doomsday scenario” in which a fundamental shift in globalization and toward a post-Bretton Woods system would lead to a fall in both the value of the U.S. dollar and dollar assets. This would raise bond yields, as well as the price of gold and various foreign currencies.

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And here we are. The S&P may rise and fall on U.S. President Donald Trump‘s daily mood swings, but the die for a new era has been cast.

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While I’ve never been great at predicting the timing of big market shifts — as a child of immigrants, I tend to de-risk too early — I do have a strong worldview. I hold fast to the idea that the entire paradigm for investing is changing, and that rebalancing away from the U.S. market is important. This will be the case with or without a trade war.

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Even if Kamala Harris were in office today, we’d be in a post-Washington consensus world (the Biden White House said as much). We’d also be heading, albeit more slowly than we are now, to a multi-polar world in which the U.S. dollar and U.S. dollar assets are no longer the only game in town.

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Few big investing stories hold for much more than a decade, and the U.S. has been on top for far longer than that. The highly financialized, concentrated, debt-driven model that put it there is tapped out in ways that go beyond Trump and his antics.

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I’d point to three fundamental issues, starting with an over-reliance on asset price-driven economic growth. Nearly all major U.S. economic decisions of the past half-century have been about bolstering asset prices, from interest rate deregulation in the late 1970s to the legalization of share buybacks to tax-favoured “performance pay” in shares, which created Silicon Valley’s massive paper wealth.

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Trump and his aides talk about how Main Street doesn’t care about stock prices. But the fact that asset price growth has so wildly outstripped income growth means we are all more reliant on capital markets.

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The exposure of U.S. households to stocks is near an all-time high (equities and mutual funds represent 26 per cent of total household assets), which implies much more vulnerability to any market downturn, for both individuals and the overall economy.

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Consider that since 1995, “equities have become the marginal driver of U.S. Federal tax receipts,” according to a January presentation by FFTT analyst Luke Gromen. “If stocks fall too far and stay down, U.S. consumer spending and GDP will go into recession, sending deficits up,” he writes. This would come at a time when inflation remains a worry and risk premiums that investors are demanding for U.S. assets are rising.

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Tariffs or not, most analysts believe there is a bigger U.S. share price correction to come. U.S. stocks are still overvalued relative to their peers. And the International Monetary Fund’s latest financial stability report tagged this as a big risk to global markets.