For investors in US equities November was indeed a month to be thankful for with the S&P 500 rising 5.9% for the month and 28% year to date with even that stellar return exceeded by the MidCap 400’s 8.8% and the SmallCap 600’s 10.9% November returns. MarketWatch headlined its story describing the month’s market action “Dow 45,000 is just the start as the stock market looks to December’s seasonal gains” using the picture of an upward ascending rocket ship to reinforce its bullish view. Indeed, the Conference Board, in its monthly survey of consumer confidence in the likelihood of higher stock prices in 12 months, saw that index reaching its historical high in a series reaching back to 1987. The party though was confined to these fifty states as the S&P indices tracking the performance of European, Latin American and Asian stocks declined 1.7%, 4.4% and 4.7% respectively. Increasingly though in the “forest” of global equities it is “the tree” of US equities that dominates as the US share of that index has doubled from 35% in 1995 to its current representation of 70%.
This month’s bipolar return of domestic and foreign equities is likely manifesting the outcome of the November 5th US presidential election with the winner of that contest having run on a platform promising the aggressive use of tariffs to address the issue of our almost $1 trillion annual trade deficit. It may be though that the real significance of the discussion of the employment of what is essentially a tax on US imports is its possible foreshadowing of the end of a global financial system that reaches all the way back in time to 1971 in which the US dollar has served as the global reserve currency. This system has not been without its benefits for the United States, but the cost of those benefits has possibly reached a price that neither this country nor the rest of the world is able to continue to pay.
A growing global economy requires an ever-increasing supply of money and most of the money that is required is, roll of the drum here, the US dollar. The source of the supply of that increasing demand for dollars is the US trade deficit which results in our importing the world’s tradable goods and the exporting of our dollars. The rest of the world cannot spend those dollars in their own countries, so those dollars owned by foreign interests are used to purchase US financial assets, the supply of which is increased by our ever-larger federal budget deficits and the increased issuance of US Treasury securities. Fortunately for investors in the US stock market though, a portion of that inflow of foreign capital is used to purchase US equities which helps to explain the value of our stock market growing at a rate five times greater than our economy this past forty years. It is also reflected in foreign interests, which owned a value of US dollar denominated assets valued at 10% of the size of our economy in the year 2000, having seen that share rise to its current level of 80%.
As mentioned above, the current “regime” has not been without its benefits for this country and its people. US corporations, which are a contributor of a significant share of our trade deficit, have experienced rising profit margins through their employment of lower cost foreign labor. The financial services industry (aka “Wall Street”) has certainly benefitted as have US geopolitical interests attested to by the thirty-seven countries that are currently subject to some form of economic sanctions by this country. The negatives though have grown to such a level that they now pose a rising threat to the wellbeing of this nation. The wealth of US households has risen dramatically in the past forty years, but the inflation adjusted income of the average US household has scarcely grown. The interest on our federal debt now exceeds the size of our defense budget. The United States Navy has been forced to significantly extend the number of years to implement its shipbuilding programs due to the “hollowing out” of this nation’s industrial base and the resulting lack of capacity to build those ships. As the benefits of the US dollar-based system are experienced by a shrinking share of our population an increasing share of the US population demanding a change has grown.
The incoming administration intends to reduce the size of this country’s trade deficit through the employment of tariffs, but this is a conversation about an effect without addressing its cause. Like many conversations though this one will likely both broaden and deepen over time to one focusing upon the cause and as it does so it will serve as a signpost indicating that we draw closer to the end of a now fifty-year-old system and the onset of the creation of the one that is destined to succeed it. It may be global central banks sale of $225 billion of US treasuries and purchase of $500 billion purchase of gold in 2023 and its 50% rise in price the past three years outpacing even that of even the S&P 500’s 39.6% that provide indications of what that system may be.
50/50 portfolios returned 3.3% for the month offsetting the negativity of October and leaving portfolios now +17.35% year to date. Equities returned 5.1% with the outperformance of small cap stocks offsetting the negative returns of foreign equities allowing that asset class to come close to if not quite reaching that of the S&P 500. The fixed income and “other” half returned 1.5% aided by the mid-month reversal in interest rates allowing fixed income to add a bit of price appreciation to their cash flow. Year to date equities have returned 21.7% and fixed income and “other” 13% so for 2024 year to date investors are thankful for an early Christmas!
Mark H. Tekamp/December 3, 2024
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