Prepare for seasons of discontent even if the war ends

More than two months on from the beginning of the third Gulf War, despite warnings of oil and gas shortages in the coming weeks, stock investors in the US have used bad news to buy on the dips.

- RAHUL JACOB

This is business as unusual: incredibly, the S&P 500 index posted a staggering one-year return of 29% as of 1 May.

Ruchir Sharma, author of The Rise and Fall of Nations, identified retail investors as the engine pulling what might be called the perpetual bull market—now more than a decade-and-a-half old. “Americans are all in on the market, holding more wealth in stocks than their homes, for the first time,” he wrote in the Financial Times. “Retail’s share of daily trading in US stocks doubled in the last 15 years to 36%.”

The war plays out on TV screens that seems akin to a video game for most investors. And this is not just a US phenomenon. The Korean Kospi has seen a 27% gain over the past month, surging 5% on 4 May alone to an all-time high. Both Korea and the US will be primary beneficiaries if the gains from artificial intelligence (AI) measure up to the hype. But in the meantime, fuel prices are surging and economies such as Korea and Taiwan are especially exposed.

The optimism bug extends even to central banks. Instead of raising interest rates in anticipation of higher prices, most have adopted a wait-and-see approach. The Bank of Japan, seeking to exit an era of easy money, had signalled a hike in April, but then elected not to raise rates partly because the Takaichi government prefers the status quo. This creates a self-reinforcing loop that propels stocks higher because, as Sharma observes, “investors have come to believe the government will always bail them out.”