The positions of the Americans is quite exceptional, and it may be believed that no democratic people will ever be placed in a similar one.

-Alexis de Tocqueville

Chinese startup DeepSeek was introduced to the world over the last weekend of the month and the following Monday, January 27th. The 17% sell-off in the market darling NVIDIA stock certainly didn’t do anything to “deep-six” investor infatuation with all things tech-related. The QQQ, an ETF that tracks the NASDAQ 100, drew $4.3 billion that day from would-be bargain hunters, its largest one-day inflow since 2021. NVDL, a security which is a leveraged play on NVIDIA stock, declined 34% that day but attracted a record inflow of $1 billion. Still, that narrative didn’t quite mesh with the equity markets’ reality for the month. Information Technology was the sole loser among the S&P’s eleven sectors, falling 2.9%. The equal-weight S&P 500 returned 3.5%, outperforming the cap-weighted version’s 2.8%. The value share of the index narrowly outpaced the growth side 2.9% to 2.7%, and the small-cap 600’s 2.9% and the mid-cap 600’s 3.8% returns demonstrated that, at least for this one month, bigger isn’t always best. US investors who hadn’t entirely given up on the merits of investing in foreign markets were rewarded with foreign developed markets’ 5.1% and European stocks’ 7% returns.

American Exceptionalism is a phrase that has come into such common usage these past several years that a Google search even offers a definition, though primarily by its effects rather than its cause. It is a phrase often used in reference to “the Magnificent Seven” stocks which are, of course, American companies. It is likely that more investors believe in AI’s “the sky is the limit” opportunity to make money in the stock market than can explain what it is; perhaps that explains our higher rates of economic growth and the superior returns of the US stock market. Our rate of economic growth has been higher than most of the world’s, which is certainly true. Of the G7 countries (Canada, France, Germany, Italy, Japan, the UK, and the US), Canada’s rate of economic growth in 2024 of 1.34% was the second highest, but less than half that of the US’s 2.77%. That is a notable reversal of fortune for this country; in the five pre-pandemic years from 2015 to 2019, the US economy grew at a rate of just over 80% of the global rate. Yet in both 2023 and 2024, the US rate of growth exceeded it by almost 10%. So, two questions come to mind: why is this occurring, and is it likely to persist?

That the United States is running very large budget deficits is scarcely new information, with our government taking in revenue of approximately $5 trillion and spending just over $6.8 trillion. The result is an increase in the market value of outstanding federal debt from 75% of the size of our national economy in 2019 to its current level of 94%. The source of growth in the deficit is attributable to the rise in federal spending from 22.6% to 24.6% of GDP. The reason for the increase in federal spending is interesting; it’s almost solely due to the rise in the amount of interest the US Treasury is paying on its debt. It is how that money is borrowed, though, that matters most to our rate of economic growth. If that debt is purchased by entities within this country, then, in terms of its ability to stimulate the economy, it’s basically a wash with those funds withdrawn from the economy to purchase the debt then reentering the economy as government spending. In 2024, though, $1 trillion of that debt was purchased with money borrowed from other countries, thus allowing our deficit to serve as a form of economic stimulus.

Perhaps even more interesting than from whom we are borrowing the money is the form in which it is being borrowed. Typically, the US Treasury uses notes and bonds with maturities ranging from two to thirty years to fund 60% to 70% of its requirements. Our former Treasury Secretary, Janet Yellen, from Q3 2022 through Q1 2024, employed a notably different funding strategy by using Treasury bills with maturities of one year or less to provide 70% of the needed funds. During the pandemic, the Federal Reserve added $5 trillion to its balance sheet through Quantitative Easing, or “QE.” Not wanting such a large sum to enter our economy with its likely inflationary consequences, the Fed attracted half that amount into its Reverse Repo program by offering above-market rates of interest on those balances. The US Treasury, with its very high volume of Treasury bill issuance, then pushed Treasury bill rates above what it was paying on Reverse Repo balances, which money market funds, the owners of those balances, then withdrew to purchase all those newly created Treasury bills. Those very large budget deficits and how they were financed are likely the true source of American Exceptionalism. As for the likelihood of its continuation, that question may well be answered by the reality that our debt has grown to such a size that the interest being paid on it has become a major contributor to our ongoing budget deficits.

January 2025 began with 50% fixed income and 50% equity investors off to a cheerful start, returning 1.82%. The equity share returned 2.9%, thus contributing most of that return for the month, mirroring US large caps’ 2.8% but pushed just a bit beyond that, assisted by US small caps’ 3.6% and foreign’s 3.2%. Fixed income offered returns exceeding their cash flow, as 10-Year US Treasury rates closed near their lows for the month and a hair’s breadth lower than their beginning-of-the-year level. Gold continued to shine as, after having risen 26.5% in 2024, it rose an additional 6.4% in this year’s first month.

Mark H. Tekamp