Commentary on Political Economy

Monday 22 January 2024

 The Markets Party Like It’s 1939

Jan. 22, 2024 1:41 pm ET

Traders work on the floor of the New York Stock Exchange in New York, Jan. 19. Photo: Spencer Platt/Getty Images

Here are some things that have happened around the world so far in 2024:

Iran-backed Houthi rebels stepped up their attacks on Western shipping targets in the Red Sea. The U.S. and U.K. responded with missile strikes inside Houthi-controlled parts of Yemen and warned they will escalate if attacks continue.

Iran’s Islamic Revolutionary Guard Corps launched assaults against targets in Iraq and Syria, claiming they were aimed at Israeli intelligence assets but nearly hitting U.S. facilities. Israel took out Iranian spies in Syria. Tehran fired missiles at alleged terrorist bases in Pakistan. Pakistan, a nuclear-armed power, responded in kind and warned of escalation.

Israel has prosecuted its offensive against Hamas in Gaza, as support for the terrorists seems to be gathering in the wider Middle East and beyond. It killed a Hezbollah commander in southern Lebanon.

In Taiwan, in an election the Chinese Communist Party dubbed a choice between “war and peace,” the people elected Lai-Ching-te, the man Beijing considers the war candidate.

North Korea’s Kim Jong Un said his country was no longer seeking peaceful reunification with the South and began referring to Seoul as the nation’s “principal enemy.”

With the war in Ukraine about to mark its second anniversary, Vladimir Putin issued threats against the Baltic republics, and a senior official of a North Atlantic Treaty Organization country said the alliance could expect war with Russia in five to eight years.

It all feels very Second Coming—if not the actual end of the world, then certainly resonant with echoes of the famous W.B. Yeats poem written just after the Great War about things falling apart and the center not holding, lyrical intimations of the even greater calamity to come. In Iowa last week we had a sighting of another sort of second coming, this one also moving its slow thighs and slouching toward New Hampshire.

All this and it’s still January.

Only the Dallas Cowboys have done their part to impart a sense of normality, again showing up for a good smacking by an underdog.

There is one big indicator that all is right and good with the world: Financial markets have resumed their upward surge from late last year, with the S&P 500 closing Friday at a record high, interest rates edging down, oil prices restrained despite the turmoil in the Middle East, and spreading optimism that the major economies can avoid a downturn.

The world may look like it’s on the brink of World War II. Investors want to party like it’s 1939.

This is the unstable platform from which we look forward to what most people seem to think will be a consequential year—what participants at the World Economic Forum in Davos, Switzerland, last week dubbed the concurrence of a soft economic landing and a hard geopolitical landing.

Divergence between financial and economic sentiment and political realities isn’t new or even illogical. On multiple occasions through history the economy has grown and the stock market boomed as war raged.

I’d never second-guess the market—which, as someone once said, can be irrational longer than I can stay solvent—but it does seem that the “inflation is dead” euphoria has gotten ahead of itself. Expectations of multiple Federal Reserve rate cuts could be undone if we get more indications that the battle isn’t yet won.

The bigger question is whether the geopolitical turmoil will derail the economics.

It’s easy to see how this could happen. War in the Middle East could escalate, sparking a surge in oil prices, refueling inflation and choking off demand. The attacks on shipping in the Red Sea could sharply raise the cost of trade, further undermining price stability. Someone somewhere could go nuclear—even the boldest bull might find that hard to take.

From the evidence of the endless handwringing about the state of the U.S. in Davos, the rest of the world seems to worry that in the circular feedback loop of these things, further turmoil could produce a Donald Trump victory in November, an event that would mark a further blow to geopolitical stability.

But the geopolitical outlook is grim in significant part because of the weakness projected by the Biden administration: its failure to deter Iran, which explains several of the events on our list; its diffidence about victory in Ukraine by a proxy it has told us is essential for global security; its vacillation on Israel’s war with Hamas and longer-term security.

I don’t doubt that a second Trump administration could heighten domestic political instability and add layers of uncertainty to an uncertain world. But perhaps for our adversaries, some uncertainty about U.S. intentions rather than certainty about the current administration’s feckless drift is overdue.

Journal Editorial Report: Edward Lawrence interviews economic strategist Jason Trennert. Images: Getty Images/Bloomberg News Composite: Mark Kelly

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Appeared in the January 23, 2024, print edition as 'The Markets Party Like It’s 1939'.

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