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” over the past several months and just now awoken, they would scarcely believe some of the headlines in the most recent issue of Barron’s: “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 Small-Cap 600 at –4.35% and –5.71%, respectively. The equity markets, however, were not a universal sea of red, with foreign markets mostly in the green. The “Trump Bump” has all but disappeared since the November 6th election, with the S&P 500 up +0.43%, the NASDAQ Composite up +0.50%, and “the Mag 7” up +1.53% since then. Tariffs, or at least the talk of them, seem to have ignited a fire under foreign markets, as Spain, Germany, and Italy are all up more than 10%, and China is up +8%, with foreign markets now outperforming those 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% over those two years, and “the Mag 7” more than doubled that number, returning 122%. Stepping back nearly an additional year to February 28, 2022, we observe an equity market landscape that scarcely resembles a bull market, with investors better off settling for the returns offered by money market funds. The average stock in the U.S. has returned 3% per year during that time, mirroring the return of small-cap stocks.

Sudden reversals in markets are often merely intrusions of a bit of fear to offset an excessive prevalence of greed, but this one might provide an exit ramp to a future substantially different from 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%, resulting in a 6.5% decline in its stock that day. The remainder of the month, through its end, makes February a month of two tales. Bitcoin, the asset that best measures investors’ attitudes towards risk, has declined 14%. “The Mag 7” stocks fell 7%, U.S. Treasury interest rates declined by a quarter percent or more, and commodity prices, which had been rising since the start 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’ that is particularly interesting.

That the United States runs very large and persistent trade deficits is scarcely news, achieving a historical high (or 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 undersave, as well as a lack of competitiveness, is likely incorrect. 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 U.S. financial assets. That excessive demand results from some countries, especially China, choosing to pursue higher rates of economic growth by running large trade surpluses rather than creating sufficient levels of demand within their populations 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. Just as “positive” savers are creditors, so “negative” savers are debtors.

Manufacturing now constitutes half the share of our economy compared to 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 on China to manufacture subcomponents for many of our weapons systems. Being the world’s largest importer of other nations’ money, however, has had its benefits. It has allowed our stock market to grow at twice the rate of those in the rest of the world in the 21st century. Indeed, foreign holdings of U.S. 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 this may be positive for our economy (a.k.a. “Main Street”), it may not be positive for the stock market (a.k.a. “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 in 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, while equity returns were +2.0% and fixed income returns were +2.5% year to date.

Mark H. Tekamp