Capital Markets Update #3

MERRY CHRISTMAS AND HAPPY HOLIDAYS!!!

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In March of this year we were confounded as the cadre of pundits, prognosticators and fund managers once again sounded a death knell over the relative value proposition offered by US markets versus global alternatives.  Writing now at year-end, the shortsightedness of this view has been rendered all the more stark.  What’s interesting to us is this alarmist view around risks to American economic exceptionalism are by no means new and seem to crop up during any meaningful domestic or foreign policy event.  We’ve been tracking macro markets for perhaps seven or eight years and it seems every 18 months offers a new antagonist to American economic exceptionalism, which, in many ways, underwrites our reserve currency status. So, let’s post-mortem the most recent 2025 US market doom call and hold the commentators accountable.  The view in April was the US economy, led by the dollar and followed by equity and debt markets, was circling the drain as a result of the President’s tariff policy.  But, in many ways, tariff policy may have been a convenient straw man for a broader, relatively consistent agenda attempting to fissure confidence around American-style capitalism.  That’s fine, American capitalism is admittedly messy, seems to change complexion every four years and takes shots under republican and democratic control, alike.  Tariffs also posed a new and complicated problem to consumer health and, de facto, earnings underwriting.  But, the smart view at that time was if tariffs were going to tank the US economy, then the rest of the world would likely follow. So, why feel relatively more protected elsewhere than here, given all of America’s economic advantages?  The underlying narrative being pushed was US dollar dominance or reserve status was at risk (not a new argument), with global equity market alternatives (primarily Chinese or European) offering a superior investment outlook (definitely a new argument).  This view happened to coincide with Germany’s announcement to loosen debt covenants on its sovereign balance sheet, the EU’s step-up in its NATO fiscal defense commitment and stimulative Chinese fiscal policy in 2025.  From January to April 2025 peak to trough, the DXY dollar index dropped 10% while the Euro gained 11%, the S&P 500 dropped 19% against the Stoxx Euro 17% decline, and the 10-year Treasury compressed 75bps while the German Bund chopped around and ended up somewhat flat.  In real time, that data is murky at best and certainly not convincing vis-à-vis the narrative.  Today, the US bond market remains strong with the 10-year Treasury bid-to-cover ratio 6-month moving average rising from 2.40x in 2023 to 2.55x today (that’s 6% more average demand for Treasuries at auction today than three years ago), the S&P 500 has outperformed the European Stoxx 600 YTD, and the DXY dollar index trades at about 99 (below 2022 – 2024 levels of ~104 but above 2018 – 2019 levels of ~96). Additionally, pundits threw a tantrum over US equity market fund flows in Q2 2025.  “Invest internationally, US equity market exceptionalism is finished” became a siren song for two months.  According to Yardeni research, about $250B of assets left US equity ETF’s and mutual funds in Q2 2025.  However, according to Apollo research, foreign ownership of US public equities reached an all-time high of 18% in June 2025 - so we can’t say there was disproportionate selling of US equities by foreign owners in Q2.  We’ve tried desperately to reliably figure out total US equity value sold, swapped out of dollars into euros, took the then ~15% ForEx loss, then used the resulting quantum to buy European equity.  The best figure we can get to is about $20B in total.  Considering the S&P 500 market cap of $47 trillion in March 2025, we can’t say this represented a fundamental move from US domiciled equity investors to pivot allocation globally, either.  In all reality, the best answer we can come up with is global investors fled global equity risk for about a month and likely pushed into the safety US Treasuries, driving 10-year Treasury rates down 75bps and the April 10-year Treasury auction bid-to-cover ratio up to 2.67x.  The huge 10% positive move in the dollar from September 2024 to January 2025 deflated and settled nearly back where it started. Finally, global central banks bought gold en masse; by the way, you don’t need dollars for that, so we will watch this trend carefully.  Gold increased about 18% from March to the end of April 2025 and has run another 50% since.  Ultimately, investors found their feet and the S&P 500 captured a 17% return YTD, bested by the Nasdaq’s 22% return.   So, in summary, we can’t say that US capital markets lost a tremendous amount of actual demand relative to their foreign peers, despite the endless stream of negative punditry.  It’s probably a topic for another note, but the depth of US private and public capital markets, starting with VC capital, financed by private credit, expanded by private equity and ultimately realized by public equity and debt is completely and utterly unmatched globally.  More importantly, the total US consumer net worth is about $176 trillion (FRED) vs about 60 trillion euros for European consumers (ECB) – so the US has a much wealthier and more durable consumer base to consume goods and services.  Finally, the US relative lack of regulation vs its European or Chinese counterparts fosters innovation and entrepreneurialism in a manner that no other large economy can match.  This is quite a potent mix, is tough to recreate elsewhere and underpins our economic advantage.  So, we believe investors should keep these insights in mind as the next call for the end to US economic exceptionalism resounds ~12 months from now.