Christopher Smart explains at Barron’s why the most significant challenges for the global economy are not the challenges making headlines today.
One of the great mysteries of today’s global markets is their irrepressible enthusiasm, even as the world appears on the verge of chaos or collapse. And yet, investors may be more rational than they appear when it comes to pricing in political risks. If investing is foremost about discounting future cash flows, it’s important to focus precisely on what will and will not affect those calculations. The potential crises that may be most dramatic or violent are, ironically, the ones that the market has the easiest time looking through.
Far more dangerous are gradual shifts in international global institutions that upend expectations about how key players will behave. Such shifts may emerge only slowly, but they can fundamentally change the calculus for pricing in risks and potential returns. …
… Political crises, however sensational, aren’t likely to change investors’ economic calculus. Even after the greatest calamities of the 20th century, markets came back fairly quickly. …
… The greatest political risk to global markets today is that key players shaping investor expectations undergo a fundamental realignment. Most concerning of all is the U.S., which is seeking to carve out a new global role for itself under President Donald Trump.
