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A trader works on the floor at the New York Stock Exchange on Oct. 28.Jeenah Moon/Reuters
John Rapley is a contributing columnist for The Globe and Mail. He is an author and academic whose books include Why Empires Fall and Twilight of the Money Gods.
After a years-long blistering rally, stock markets in the U.S. plateaued last spring, and have traded largely sideways since. In the months since the S&P500 hit the 7,500 mark, investors have made it increasingly clear that they’re tiring of promises from the AI hyperscalers and want to see the money. As a result, firms that are spending heavily on data centres without proportionately boosting their returns are finding their stock prices punished.
Is it any surprise that on Friday, the Financial Times reported that the asset manager Blackstone said Anthropic could have a junk credit rating after its impending public offering? News of Amazon’s aggressive AI expenditure plan and Intel’s heavy spending brought further gloom to the market. The tech-heavy Nasdaq closed nearly 3-per-cent down on Friday, after suffering its biggest single-day drop since June 5.
Nasdaq faces $2-trillion wipeout in October as AI spending fears deepen
It may be that the investment bubble fuelling the economy has reached its limits. Not only have U.S. fiscal deficits flooded the economy with cash, much of which is finding its way into the stock market, but the hyperscalers are issuing a huge volume of bonds to fund their own investments. This competition for lending is driving up interest rates, which is starting to squeeze the bottom lines of both governments and businesses.
Optimists dismiss concerns that the boom is running out of steam and say that once Tuesday’s elections have passed, the stock market will resume rallying, as it generally does after midterm elections. The entry of Anthropic to the stock market in November could further kickstart a rally.
Then again, as Friday’s news might suggest, Anthropic could also do as the SpaceX IPO did, suck in a lot of capital but leave the overall market in a funk. Besides, while it’s true that U.S. investors often like divided government – in theory, counter-balancing factions makes for more sensible policies – these elections may usher in an unusually volatile period. Speculation is running high that the war on Iran will resume after the U.S. elections, owing to the converging motives of Benjamin Netanyahu and Donald Trump. With this week’s Israeli elections delivering an inconclusive outcome, many analysts believe Mr. Netanyahu will relaunch a war to cement his hold on power.
Mr. Trump’s calculus differs somewhat, given that unlike in Israel the war is deeply unpopular in the U.S. It’s not actually clear what resuming it would accomplish, and some analysts speculate Mr. Trump is motivated purely by a desire for revenge on a regime that has humiliated him. But what seems likely is that any new fighting would probably be as inconclusive as previous rounds while also producing a sharp escalation in the conflict.
That would ensure oil prices, already well above their prewar levels, would go even higher and stay there. Oil traders are more or less resigned to such a scenario and expect prices to remain at elevated levels well into next year.
That might provide the Canadian oil industry with a windfall while offering support to Prime Minister Mark Carney’s plan to build a West Coast pipeline, something the B.C. election may have helped bring a step closer. However, the substitution of Venezuelan for Canadian oil in Texas refineries has reduced demand for Canada’s product, while rising shipping costs to Asia will neutralize some of the benefits of any eventual pipeline.
In the meantime, an oil shock would guarantee that inflation remains above target into next year, and possibly longer, forcing central banks to keep raising interest rates, as the Bank of Canada acknowledged this week with its own hike.
Analysis: A weakened Trump still means trouble for the Canadian economy
To this risk must be added another possible element of volatility, namely Mr. Trump’s response to Tuesday’s elections. Most forecasts expect the Democrats to take both chambers of Congress, which will greatly weaken Mr. Trump domestically. But given his track record of responding to losses – namely, insisting that any election that goes against him was rigged– it can’t be assumed he will accept the results. He may begin contesting outcomes and challenging results, which could produce a period of instability in American politics, at least until the new Congress is sworn in next January.
None of this would be good for markets. Were share prices in the U.S. to continue stagnating or worse, fall, the economy could feel the impact. The lower half of the U.S. population, which is dependent on their labour income, is suffering from flat real wages, rising inflation and depleted savings, making it feel for them like the economy’s already in recession. The top half, enriched by their stock market gains, have helped keep the economy afloat. A weak stock market could well cause them to pull in their horns.
As this week’s U.S. GDP report showed, investment, government spending and consumption by asset-owners is keeping the economy afloat. High interest rates could choke all of that. Were the U.S. economy to consequently slow down, Canada couldn’t help but get caught in the undertow. On the plus side, Canada would enter any downturn in relatively resilient shape, with good fiscal accounts, lower inflation and real wages that have held up better than south of the border.
Still, it’s probably a good time for prudence on everyone’s part, because it could be a cold winter.