How quickly things change.
In January, “US exceptionalism” was the undisputed macro-market consensus. Fast forward just three months, and the zeitgeist is “sell America.”
You were warned. By me. Ok, let’s be real: Not so much “by me” as by me, quoting other people.
Unfortunately, all I can take credit for here is flagging some analyst commentary which tipped a prospective shift in investor preferences away from what, when 2025 dawned, was existential US equity outperformance.
There’s the chart, updated. US equity exceptionalism, as measured by the ratio between the MSCI USA index and the MSCI World ex-USA gauge, peaked in mid-December.
There’s no question as to what’s behind the shift. On an eight-week rolling basis, the narrative, as manifested in that simple metric, flipped during Inauguration Week.
The rapidity of this unfolding, 180-degree zeitgeist turn accelerated to -13% as of this week’s earliest trading, matching the pace of US outperformance witnessed on the same rolling two-month measure during the mad rush into US shares in the six or so weeks after the election.
As discussed here previously, the flows data reflects large foreign selling of US shares. The figure above, from Nomura, gives you some context using EPFR’s weekly release broken down to show foreign-domiciled US equity fund flows.
This shift has implications for the dollar. “The increased weight towards US equities during the bull market years… has likely lowered the bar for repatriation flows driven by negative asset price moves, thus increasing the sensitivity of the dollar to equity valuations,” Deutsche Bank’s FX strategy team wrote late last week, in a special report.
In the same piece, mentioned here on Monday, the bank’s George Saravelos cautioned that, “If US-centric trade actions are determined by market participants to represent a structural shift in policy over the next several years, eroding the US equity exceptionalism narrative, it is likely that investors will begin to increase allocations to non-US markets, presenting a headwind to the dollar over the near- to medium-term.”
On January 31, I asked “What If Trump’s American ‘Golden Age’ Is A Sunset?” Five days later, I wondered, “Is 2025’s ‘Buy America’ Credo Too Consensus To Be Right?”
Now here we are.
What you are saying is true, but I hope american exceptionalism will prevail and our stock investments will recover.
I’m certainly looking to increase my US holdings in future again after selling a lot in Feb. Even though we live in unprecedented times it’s hard to imagine Trump could end American exceptionalism. GFC didn’t. Anyone who has tried Deep Research should know the AI story is still there and I have yet to see international competitors offering something similar. Chatbots are useless but that thing is as good as an intern. Need to be mindful of the risk that this is a blip, something unexpected happens and US stocks recover and not miss the recovery. I’m a retail fool though, so probably a contrarian indicator (and currently significantly underweight US).
The number of “true believers” is most probably shrinking. Even my neighbor who knows nothing about what’s really going on out there knows she’s a lot more poor than she was two weeks ago and is now fearful. Half my neighbors are retirees. After the GFC it took almost 10 years for my daughter’s family to fully recover from the downdraft in their retirement savings. I don’t know how much is gone from my asset base. As of last Friday I was down about half the “market” loss. I don’t add to my stock holdings so I won’t be “buying the dip.” For the next three years that will generally be a bad trade since the morons who run this country’s finances have no concept of the consequences their planned actions will have. If we survive my guess is it will be at least 2050 before any recovery would be possible. Let’s face it there are no plausible leaders on the horizon in either party.
The H of 5 years ago would equivocate more, when reading the analyst chicken entrails. Or perhaps the entrails of the day leave no room for ambiguity. In any case, I was convinced by your rhetoric to rotate some 20% of my boring buy-and-hold IRA portfolio out of US and into international equities, starting in early January. I even threw in some shiny yellow doorstops for variety, replacing a small long-duration bond position.
Needless to say, one source of calm for me in the past weeks has been seeing the occasional flash of green among my positions and knowing that it could’ve been worse.