The US financial landscape has seen remarkable changes over the past two years. Shares in the stock market have risen dramatically, with the S&P 500 increasing by around 40% since Joe Biden took office. Meanwhile, the value of the dollar has strengthened, and the price of gold has reached record highs.
While the emergence of artificial intelligence has driven tech sector gains, the rise in other assets like gold and stocks has created a puzzle for economists. Various factors, including US monetary policy and economic strength, seem to play a role in this complex scenario.
US Stock Market Surge
The US stock market has surged remarkably in the past two years. The S&P 500 has increased by approximately 40% since Joe Biden took office in January 2021. Alongside this, the Dow Jones and Nasdaq indices have also set new records repeatedly during this period. Investors have been excitedly following this upward trend, trying to decipher the reasons behind it.
Economists and commentators are puzzled. Some attribute this boom to the rapid development of artificial intelligence since late 2022. Companies like Nvidia, a major chip maker, have enjoyed tremendous gains. However, the increase in stock values is not limited to the tech sector alone; the rise seems to be happening across the board.
The Role of US Monetary Policy
Questions arise about the role of US monetary policy. Interest rates in the US have risen over the past two and a half years, including long-term rates. Typically, rising interest rates would cause stock markets and commodity prices to drop. Higher interest rates generally reduce the present value of future corporate profits, leading investors to prefer bonds over stocks. However, in this case, both the stock market and gold prices have surged.
One argument is that market speculators expect the Federal Reserve to ease monetary policy soon. This future expectation might explain the high stock and gold prices. Despite rising interest rates, the anticipation of monetary easing has influenced investor behaviour, contradicting traditional market reactions.
Strengthening US Dollar
Contradicting the monetary policy explanation is the strong performance of the US dollar. The dollar has surged by approximately 14% compared to three years ago. Typically, if real interest rates are expected to fall, the dollar would weaken. However, it has reached a 20-year high.
Another explanation suggests that countries, especially potential US adversaries like China, are diversifying away from the dollar. However, if this were the case, the dollar would not be as strong as it is currently. There is minimal evidence to suggest that geopolitical tensions are causing a global shift away from the dollar.
Robust US Economy
The robust performance of the US economy is a key factor in the rising asset values. Despite a slowdown to 2.5% growth in 2023, this rate is still above the average growth for this century of about 2% since 2001. Strong consumer demand has been bolstered by significant economic policies from the Biden administration, including the Chips and Science Act, the Infrastructure Investment and Jobs Act, and the Inflation Reduction Act.
These economic policies have provided a stimulus, keeping growth above expectations for the past three years. Two years ago, many believed the US was on the brink of a recession. However, growth continued in 2021 and 2022, defying bleak predictions. This unexpected performance has also kept demand high for US stocks, gold, and the dollar. Investors worldwide see US assets as a safe haven, indicating confidence in the stability and resilience of the US economy.
Geopolitical Factors
The geopolitical landscape also plays a role. Although tensions with China have intensified, there’s little evidence to suggest that this is driving the increase in asset values. If geopolitical tensions were a significant factor, we would expect the dollar to weaken as countries move away from it. Yet, the dollar remains robust.
Instead, the strength of the US economy appears to be the driving force. Each unexpected economic gain fuels demand for US assets, pushing up the prices of stocks, gold, and the dollar. However, it remains uncertain whether these trends will continue, especially with the upcoming presidential election.
Conclusion: A Multi-Faceted Explanation
In summary, the surge in US shares, gold, and the dollar is a complex phenomenon. It appears to be driven by a combination of factors, including the emergence of artificial intelligence, US monetary policy expectations, the robust economy, and investor confidence. Each element contributes differently, creating a scenario where traditional economic models may not fully apply.
Whatever the driving forces, it’s clear that the US financial landscape is experiencing an unusual and significant period. Investors and analysts will continue to monitor these trends closely to determine their sustainability and long-term impact.
The surge in US shares, gold, and the dollar is a complex phenomenon with multiple facets. The rise of artificial intelligence, expectations around US monetary policy, a robust economy, and strong investor confidence all contribute significantly.
As we dissect these elements, it’s clear that traditional economic models may not fully capture what’s occurring. Investors and analysts will continue to watch these trends closely to understand their long-term impact. Whatever the cause, this period marks a significant phase in the financial landscape, showcasing the resilience and dynamism of the US economy.