To everything there is a season, and a time to every purpose under heaven. Ecclesiastes 3:1

Had an investor pulled a “Rip Van Winkle” the past several months and only just awoken they would have scarcely believed some of the headlines in the most recent issue of Barrons; “Chinese Stocks Are Beating U.S. Ones. What to Buy.” “Gold Is Hot. You Should Play It Now.” “Consumer Spending is Down and Could Threaten Economic Growth.” Where is the Apple of our AI? For the month “the 500” was –1.30% with those of the Mid-Cap 400 and the SmallCap 600 –4.35% and –5.71% respectively. The equity markets though were not a universal sea of red with foreign markets mostly green. The “Trump Bump” has all but disappeared since the November 6th election with the S&P 500 +0.43%, the NASDAQ Composite +0.50% and “the Mag 7” +1.53% since then. Tariffs or at least the talk of them, though, seem to have lit a fire under foreign markets as Spain, Germany and Italy are all up more than 10% and China +8% with foreign markets now outperforming that of the U.S. by the greatest amount year to date in thirty years.

Since the market’s recovery from its 20% decline in 2022 investors have been lulled into the belief that if much of the market hasn’t been particularly good what has been is great. The S&P 500 was up over 25% in both 2023 and 2024, Information Technology stocks were up nearly 60% those two years and “the Mag 7” more than doubled that number returning 122%. Stepping back almost an additional year to February 28, 2022, we observe though an equity market landscape that scarcely looks like that of a bull market with investors better off settling for the returns on offer from money market funds. The average stock in the U.S. has returned 3% per year during that span of time mirroring the return of small cap stocks.

Sudden reversals in markets are often just intrusions of a bit of fear to offset an excessive prevalence of greed but this one might be an exit ramp to a future a good deal different than that of the recent past. In fact, we can identify both the date and the event; Thursday, February 20th and the release of Walmart’s guidance on its current fiscal year’s earnings and revenue. The profit figures weren’t a problem, but the revenue forecast was, as the company expects sales growth of only 3% to 4% with that news resulting in a 6.5% decline in its stock that day. The remainder of the month through its end make February a month of two tales. Bitcoin, the asset that best measures investor’s attitude towards risk, has declined 14%. “The Mag 7” stocks fell 7%, US Treasury interest rates declined by one-quarter percent or more and commodity prices, which had been rising since the first of the year, fell, with energy related commodities down 6%. Admittedly those aren’t big numbers but the change in both direction and degree is notable and together they tell a story; the financial markets are starting to anticipate a lower rate of economic growth. It is the why though that is particularly interesting.

That the United States runs very large and persistent trade deficits is scarcely news achieving a historical high (low?) of $1.2 Trillion in 2024. That this is also the reason for our very large government budget deficits though might be. The conventional view that our trade deficits reflect our tendencies to over consume and under save and a lack of competitiveness is likely not correct. In today’s global financial system, it is now capital flows that drive trade flows and the cause of those increasing capital flows into this country is the excessive demand for US financial assets. That excessive demand is the result of some countries, most especially China, choosing to pursue higher rates of economic growth by running large trade surpluses rather than creating sufficient levels of demand in their population to consume what their economies produce. To describe this a bit more succinctly; in every economy everything must be consumed or saved and everything saved must be invested. When available savings due to foreign capital flows exceed the demand for investment then savings become negative and just as “positive” savers are creditors so “negative” savers are debtors.

Manufacturing is now half the share of our economy of that of Germany and Japan and the value of what it produces is half that of China. Perhaps most consequential from a geopolitical perspective, the U.S. now depends upon China to manufacture subcomponents for many of our weapon’s systems. Being the world’s largest importer of other nation’s money though has had its benefits. It has allowed our stock market to grow at twice the rate of those of the rest of the world in the 21st century. Indeed, foreign holdings of US equities have doubled from $8 to $16 trillion since 2020. For all the talk of tariffs, the Trump administration understands that to reduce our federal debt we must also restrict the volume of our imports of foreign capital. While positive for our economy aka “Main Street” it may not be positive for the stock market aka “Wall Street” and this may be what the stock market is starting to “sniff out.”

As we are increasingly employing strategies to protect portfolios from equity market risk, we’re reducing the equity weighting to the model portfolio to 40% with increased exposure to gold occupying a share of that reduced 10% weighting. Portfolio returns are +2.7% year to date and +0.9% for the month. Equity returns were -1.0% with fixed income returning +1.7% in February with equity returns +2.0% and fixed income returns +2.5% year to date.

Mark H. Tekamp