the forces of deregulation, free trade and open markets that powered stocks and bonds through the past three decades are under siege. the rise of donald trump, britain<u+2019>s vote to leave the european union and the upsurge in populism across much of europe are worrying signs that the assumptions investors relied on may need to change. unfortunately, investing for deglobalization is hard. less trade means slower growth, which hurts stocks. the combination of higher costs and less efficient supply chains means higher inflation, which is bad for bonds. more red tape is bad for profits. more government spending would mean higher taxes or bigger deficits, or both. <u+201c>we are moving away from free markets to semi- or quasi-administered price systems,<u+201d> said pascal blanqu<u+00e9>, chief investment officer at amundi, europe<u+2019>s largest asset manager. <u+201c>we have got potentially something that could remind us more of the <u+2019>70s.<u+201d> the 1970s were an extreme example of stagflation<u+2014>rising prices and sluggish growth<u+2014>and the world is far from the 14% inflation hit at the end of the decade. in the three decades that followed, investors came to accept the exact opposite as the norm. <u+201c>the investment community in the last 25 years has been long global trade,<u+201d> mr. blanqu<u+00e9> said. trade was slowing even before the recent populist backlash, and investors now need to look for a new model. mr. blanqu<u+00e9><u+2019>s hope is that populism dies down, but even then he expects the shift to domestic-led growth to continue. he<u+2019>s put money into emerging-market companies serving consumers in an effort to profit from this benign form of deglobalization. a triumph of the populists wouldn<u+2019>t be benign. for now an imminent populist victory seems unlikely, with mr. trump lagging in the u.s. presidential polls and new u.k. prime minister theresa may toning down her rhetoric after attacks on global elites. the rise of populists in spain hasn<u+2019>t changed the government, and in greece the populist government accepted conventional policies imposed by the eu. the bad news is that the outlook isn<u+2019>t good. even hillary clinton, a fully-paid-up member of the global elite, abandoned her public support for the trans-pacific partnership under pressure in the primaries from sen. bernie sanders. the eu-canada free-trade agreement is on the rocks after seven years of talks as a belgian regional parliament refuses to ratify it. in one sense, the populists are winning, shifting the public debate in their favor. <u+201c>the roots of voter rage run deeply,<u+201d> barclays currency strategist marvin barth wrote in a note to clients sunday. he argues that the populist backlash against global elites has further to run, and investors should prepare. those who accept that a historic shift is under way have a natural point of reference: the election of margaret thatcher in the u.k. in 1979 and ronald reagan in the u.s. a year later. it was, with hindsight, the start of three decades of liberalization and free trade. the reversal in markets was dramatic, if not instant. the best-performing stock-market sectors in the years leading up to reagan<u+2019>s election have been the worst performers since, and vice versa. from 1973, when datastream u.s. sector data starts, to reagan<u+2019>s landslide in november 1980, oil and gas, telecoms and basic materials (chemical production and the like) produced the best returns. health-care and consumer stocks lost money for investors, even including dividends. since then health care has been by far the best sector to invest in, producing a 14.6% annualized return including dividends, followed by consumer services. oil and gas, telecoms and basic materials were the three worst places to be, although all still made good money. bonds had a similar transformation, as interest rates were raised in the u.s. and u.k. to kill inflation. cause and effect are hard to disentangle. but if inflation rises again, then real assets such as property and gold should do well, as in the 1970s. slower growth and more red tape will hurt more productive sectors; mrs. clinton<u+2019>s promised clampdown on drug prices has already hit pharmaceutical stocks. another grand reversal in markets is plausible. the problem with living through a historic shift is that few spot it at the time. three years after thatcher came to power, british investors had little to show for it, as the return on u.k. shares had merely matched inflation. from reagan<u+2019>s election to august 1982, u.s. stocks had lost 22% after inflation, even including dividends. those who bought bonds had a terrible time as 10-year treasury yields soared to 15% within a year. still, patient investors were rewarded, as the bull market tripled money put into stocks in real terms by the end of the decade, and bond yields halved. betting on the rise of populism is at least as tough, even for investors who are proved right. few will be convinced enough to stick with a bet on populism that loses in a big way for two or three years. long-term trends are hard to hold on to in the face of short-term volatility, and one thing today<u+2019>s politics guarantees is volatility. write to james mackintosh at james.mackintosh@wsj.com
the trump trade: a bet on the end of reagan<u+2019>s market legacy  - wsj
james mackintosh