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April 22, 2025

Global Investors Bail on the U.S. Should You?

Stocks suffered another big setback yesterday as Donald Trump escalated his feud against Fed Chair Jerome Powell. This new threat to central bank independence has only exacerbated already rattled investor confidence in the U.S.

The S&P 500 declined 2.4%, with the tech-heavy NASDAQ performing slightly worse, down 2.6%.

Through yesterday, the S&P 500 has given up most of its gains since Trump announced his 90 day tariff pause. The S&P 500 is now less than 4% above its lowest levels of the year just prior to the pause.

As frustrating as this year has been, investors with adequate liquidity and a long time horizon have the opportunity to buy high quality U.S. stocks at prices that may seem quite attractive in the future.

Meanwhile, we continue to favor gold and Bitcoin exposure as portfolio hedges. Both assets should benefit from dollar weakness and what will likely become a global shift towards easier monetary policy if the growth outlook continues to deteriorate.

First tariffs, now this

Coming on the heels of a tariff debacle that remains unresolved, the battle over control of the Fed opens a fresh wound.

The issue is not so much who is right or wrong about whether or not interest rates should be cut at the moment.

Trump may have some valid points. “Too Late” Powell may indeed be under-reacting with his “wait and see” approach.

The issue is the institutional independence of the Fed and Trump’s willingness to respect the letter and the spirit of the law. In theory, Powell can be fired by the President as Chair “for cause,” but not for mere policy disagreements.

An independent central bank is widely viewed as the cornerstone of an investable market. It is a key area of focus for investors in emerging markets. Investors in a major developed markets usually just take it for granted.

When politicians can direct central bankers to do their bidding, the economic environment becomes unpredictable. Trust is lost.

The U.S. has historically been seen by investors as providing the legal and political foundation of the entire global financial system.

Investors expect stability and predictability from the U.S. They do not like to see a President even contemplate legally murky maneuvers to eject a Fed Chair just because he wants easier monetary policy.

While the Fed and the Executive Branch are separate entities, and the Supreme Court would likely rule that should push come to shove, Trump is not wrong to want lower rates.

Inflation is low, and new data suggests economic trouble on the horizon. Nonetheless, Powell will likely be reluctant to move until he sees multiple data points pointing to rising unemployment.

Capital flight

What we have witnessed over the past several weeks is a wholesale exodus from U.S. capital markets.

We see this in stocks, which have declined sharply.

We see this in government bonds, where long-term yields in the U.S. have risen, even though they typically fall when recession risk rises.

We see this in the U.S. dollar. The Dollar Index (DXY), which measures the U.S. dollar versus a basket of major foreign currencies, is now down more than 9% on a year to date basis.

We also see it in the price of gold and more recently in Bitcoin.

Gold has advanced some 25% year to date.

Bitcoin, which had been declining with stocks, has reversed course and has significantly outperformed U.S. stocks since the beginning of April.

From hero to zero

It was less than ten weeks ago (February 19, 2025 to be exact) that the S&P 500 (and by extension, U.S. economic exceptionalism) reached an all-time high.

Investors were heavily focused on the AI opportunity and its potential to drive growth and productivity across the entire economy.

Now, instead of conversations about the U.S. dominating the technologies of the future, we are talking about reshoring textile mills from Vietnam.

What the heck has happened?

Because the market narrative has shifted so abruptly, we are currently witnessing a severe reallocation of capital in a very rapid time frame.

In the months that followed the election, global investors were pouring money into the U.S. stock market.

Just four weeks before the market peaked, legendary investor Stan Druckenmiller told CNBC: “I’ve been doing this for 49 years, and we’re probably going from the most anti-business administration to the opposite. So we do a lot of talking to CEOs and companies on the ground, and I’d say CEOs are somewhere between relieved and giddy.”

Druckenmiller went on to comment that business confidence was at record levels and that the economy looks “very, very strong at least for the next six months.”

Investors for the most part were also giddy. Now they are dismayed.

Whiplash

The rapid decline in the Dollar Index tells the story. The downward pressure seen in the dollar this year began as markets responded to Trump’s tariff initiatives.

Speculation over tariffs picked up steam in March. The dollar then saw another leg down after Liberation Day on April 2.

Dollar Index (DXY) - Year to Date

Initially, there was concern that Trump’s tariff policy could lead to upward pressure on the dollar, which was experienced in 2018 when Trump applied tariffs to China.

Tariffs make foreign goods less attractive to U.S. consumers, which in turn creates lower demand for foreign currencies.

On top of this, tariffs create an incentive for foreign countries to depreciate the relative value of their currencies through easier monetary policy. By making their currency cheaper, foreign countries can make their goods more competitive and help offset the negative impact of tariffs.

The opposite has happened, however, as investors appear more focused on a potential growth slowdown in the U.S. and the overall policy uncertainty.

The movement of capital out of the U.S. appears to be overwhelming any tariff-related demand for U.S. dollars.

But the starting point was high.

While the decline in the dollar in recent weeks is significant, viewed over a longer time frame, one can see the dollar started its descent from a relatively elevated position.

In early January, the Dollar Index was higher than it had been at any point since late 2022, when it peaked above 110 (for the first time in 20 years).

After the election, capital flowed into the U.S. based on enthusiasm for Trump’s tech-focused growth agenda. The Dollar Index rallied nearly 10% between the election and early January.

Dollar Index (DXY) - Past 5 Years

The Dollar Index is now only marginally below where it was prior to the November election. While at the low end of its trading range over the past three years, the index is still about 10% above it lowest levels within the past five years.

So while the dollar has seen a rapid adjustment in recent weeks, it still sits at levels that are in line with recent history and relatively high over a longer time frame.

U.S. stocks were also on a pedestal.

Perhaps the most striking feature of global stock markets over the past 10 years is the extent to which U.S. stocks, led primarily by mega-cap tech stocks, have outperformed the rest of the world.

U.S. equity markets—driven to new heights by dynamic and innovative companies like those of the Mag Seven—have been the only place to be for investors over the last decade.

The key to success for global fund managers has been the extent to which their portfolios have been skewed toward U.S. companies.

S&P 500, NASDAQ, Foreign Developed, EM

Total Return- Past 10 Years

What we are witnessing in recent weeks is a rather radical reappraisal of U.S. capital markets. It has been sparked by a misguided economic policy pivot away from innovation, deregulation and leaner government towards reducing trade deficits.

And now, to make matters worse, the administration is creating fresh anxiety in already frazzled global markets by undermining the Fed’s independent status.

So is U.S. exceptionalism really over? Is it time to give up on U.S. stocks?

We would argue no, for two primary reasons.

First, while the tariff situation in multiple ways has damaged the economic growth outlook in the U.S., and raised the odds of a recession, the U.S. stocks investors are dumping today are ultimately the same companies that they were tripping over themselves to purchase in mid-February.

The economy may be slowing, but the long-term drivers of success for great American businesses, like the ones we have included in our Model Portfolios, remain intact.

What has principally changed is that the near-term economic outlook has diminished. But valuations have come down sharply too, which compensates investors for that risk.

Second, are foreign stocks and currencies really that much more attractive now? Peek beneath the hood of any leading European or Japanese company, and you will typically find very high exposure, direct or indirect, to the U.S. economy.

U.S. policy mistakes may be hurting the American brand at the moment, but they are not fixing the various structural problems that plague the EU, Japan, China and other major international destinations for equity investors.

Silver linings

In addition to lower valuations, there are some silver linings to the U.S. stock market sell-off.

Rapid investor repositioning away from U.S. assets, which has cut the value of the dollar, creates a bit of a tailwind for U.S. corporate earnings.

Approximately 40% of the underlying revenue generated by S&P 500 Index companies is outside the U.S. Nearly 50% of the revenue generated by NASDAQ Composite is from foreign customers.

As the dollar weakens, the value of foreign sourced revenue mathematically rises in dollar terms. The products and services of U.S. businesses also become more competitive abroad as the dollar retreats.

Interest rate cuts may also be in our future, whether or not Powell is in his seat for the remainder of his term.

Powell may be reluctant to cut rates now, given the uncertain impact of tariffs on inflation. This has produced a situation where investors are less willing to price in future rate cuts, on top of the confidence issue created by Trump’s aggressiveness towards Powell.

But to the extent we start to see the economic weakness markets are now pricing in, the Fed likely will start cutting, which will lend support to stock prices.

Gold and Bitcoin as portfolio hedges

While stocks remain vulnerable to negative sentiment in the short-term, gold and Bitcoin are now both benefiting from the uncertainty affecting the U.S. dollar.

A key factor to consider is that these are global commodities and their value is a function of demand from buyers around the world. As the dollar weakens relative to other currencies, gold and Bitcoin in dollar terms tend to rise.

Gold has soared this year, up approximately 25%, as central banks and investors have fled the U.S. dollar and U.S. Treasuries.

Bitcoin has not performed as well, although it is now outperforming the S&P 500 on a year to date basis. Bitcoin’s performance over the past six months, however, which includes the post-election surge, is still outpacing gold.  

Bitcoin sold off along with stocks from mid-February to early April, before the tariff pause, and gave up about half of its post-election gains.

But Bitcoin has lately been diverging from the path of equities. The S&P 500 Index is down approximately 7.6% in April, while Bitcoin is now up 4.5%.

The Trump-Powell drama over interest rates and control over the Federal Reserve has sharpened focus on the core investment proposition of Bitcoin.

Bitcoin is a decentralized non-sovereign monetary technology. It is a digital commodity that is ultimately controlled by nobody.

The supply of Bitcoin cannot be expanded by politicians or their appointees via interest rate manipulations.

In the face of an economic slowdown and restricted trade flows, there is a developing sense of urgency around the world to support export competitiveness. Money printing in one country leads to money printing in another.

It is not surprising to see Bitcoin regain momentum as challenges to the independence of the world’s most important central bank (and manufacturer of paper money) now dominate the headlines.

Gold has been an excellent hedge for stock portfolios this year. Bitcoin is starting to playing that role as well.

Focusing on long-term outcomes

The stunning collapse in investor sentiment towards the U.S. has driven a surge in volatility and rapid price adjustments.

Intrepid investors have the opportunity to get exposure to great companies at a moment when others are frantically trying to cut their own.

Gold and Bitcoin remain attractive assets for investors to pair with U.S. equity exposure. They are likely to perform well to the extent we see further dollar weakening and aggressive rate cutting/money printing by central banks around the world to counter a potential recession.

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