The Markets

As the market turns...

When investor preferences shift and money flows from one sector, industry, investment style or geographic region into another, it is called a market rotation.

For years, stock markets in the United States have outperformed stock markets elsewhere. “The outperformance is attributed to U.S. exceptionalism fueled by a strong culture of innovation and entrepreneurship; more flexible labor markets; higher productivity; stronger consumer consumption driving demand for goods and services; a more favorable regulatory environment; lower corporate taxes; stronger intellectual property rights; and more open markets and trade policy,” reported Larry Swedroe of Morningstar.

One consequence of U.S. outperformance is that investors outside of the United States own a lot of U.S. stocks, about $18.4 trillion, reported Tracy Alloway and Joe Weisenthal of Bloomberg. The percent of European investors’ total equity portfolios invested in U.S. stocks has more than tripled since 2011, in part due to strong performance.

Now, Europe’s financial markets are outperforming those in the United States.

“Across assets of all stripes, the Old Continent is collectively trouncing America in a way that’s rarely been seen before…German bonds last week beat Treasuries by the most ever. And while European shares have been knocked by the trade war, they’re turning out to be far more resilient than American ones,” reported Alice Gledhill, Abhinav Ramnarayan, and Julien Ponthus of Bloomberg last week.

Over the last two months, global investors have backed away from United States markets. Bank of America’s monthly global fund manager survey found that asset managers have reduced U.S. allocations by more than half since February. “A majority think a trade war that triggers global recession is the biggest risk for markets,” reported Reuters.

The recent geographic market rotation was a reminder of the importance of diversification. While diversification won’t prevent losses, it can help investors effectively manage risk. Investors who held a geographical diversified portfolio may have fared better this year than those who invested only in the United States.

Last week, which was shortened by a holiday, major U.S. stock indices moved lower, reported Teresa Rivas of Barron’s. Yields on U.S. Treasuries were mixed over the week.

Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

 THE CURIOUS PATH OF THE U.S. DOLLAR. It’s easy to overlook the importance of the U.S. dollar. Many people have a few bills tucked in their wallets to buy sodas from vending machines, purchase vegetables at a farmer’s market, or pay their babysitters at the end of an evening out.

A lot of the currency issued by the United States is not held by U.S. citizens and U.S. companies. It is tucked away in central banks around the world. For decades, the U.S. dollar has been the world’s primary reserve currency, reported The Economist. The newspaper explained:

“For decades investors have counted on the stability of American assets, making them the keystones of global finance. The depth of a $27trn market helps make Treasuries a haven; the dollar dominates trade in everything from goods and commodities to derivatives. The system is buttressed by the Federal Reserve, which promises low inflation, and by America’s sturdy governance, under which foreigners and their money have been welcome and secure.”

The U.S. dollar is not as dominant as it once was. In the early 2000s, many central banks began to diversify their holdings into Australian and Canadian dollars, Swedish krona, and Swiss francs, reported The Economist.

Regardless, the reason other countries keep their reserves in U.S. dollars is because the U.S. has large and open financial markets and other countries can access their reserves when needed, reported Anshu Siripurapu and Noah Berman of CFR.

Is the U.S. dollar a safe haven?
Normally, when markets become volatile and investors flee to perceived “safe havens”, the U.S. dollar strengthens. But that isn’t what happened recently. Since the start of the year, the United States dollar has weakened despite market volatility, reported Randall Forsyth of Barron’s.

“…the chaotic rollout of…tariff policy has resulted in declines in the dollar and prices of longer-term U.S. government securities in tandem with declines in risky assets such as stocks—a reaction contrary to the currency’s and Treasuries’ usual performance as havens during episodes of market volatility. Markets stabilized in the latest week but remain on edge,” wrote Forsyth.

One market concern is that falling demand for the U.S. dollar and rising U.S. Treasury yields could spell trouble for the United States. High demand makes it possible for the U.S. to borrow money at a low cost, reported CFR. If demand falls, that could change.

“…rising Treasury yields also cloud the outlook for U.S. government spending, and by extension economic growth. Higher yields mean the U.S. government will owe more interest on any debt it rolls over or issues for new spending, exacerbating worries about the federal deficit,” reported Jesse Pound of CNBC.

The federal deficit is the difference between what the government receives and what it pays out. Each annual deficit is added to the national debt.

Weekly Focus – Think About It
“All that you touch You Change.
All that you Change Changes you.
The only lasting truth Is Change.”
–Octavia Butler, Author

The Markets

All eyes on the bond market.

The scale of the tariffs introduced by the administration shocked investors, sparking a roller coaster of a week for stock markets. Last week, U.S. stocks:

• Rallied on a rumor.
• Fell when the rumor was recognized as a rumor.
• Rose when President Trump paused reciprocal tariffs on most countries for 90-days.
• Fell as investors considered how the remaining baseline tariffs (10 percent on all countries, steel and aluminum tariffs, and 100%+ tariffs on China) might affect companies and economies.
• Rallied after the Federal Reserve assured investors it was prepared to step in, if needed.

“Economic angst enveloped every corner of Wall Street as U.S.-China trade tensions escalated, sparking a slide in stocks, the dollar and oil, with liquidations in U.S. assets pointing to disorder in the financial system,” reported Rita Nazareth, Isabelle Lee, Denitsa Tsekova, and Vildana Hajric of Bloomberg.”

Disorder in the financial system

Some of the disorder was found in the United States Treasury market where yields were moving higher when many expected them to move lower. Investors who are concerned about risk and sell stocks tend to seek financial shelter in investments that are perceived to be steady in a storm. For many years, United States Treasuries have been a “safe haven”.

 So, last week, there was an expectation that, as investors sought shelter from the tariff storm, rising demand would push Treasury yields lower. That wasn’t the case. Investors sold U.S. Treasuries, pushing yields higher, reported Sydney Maki and Carter Johnson of Bloomberg.

“Billed as so rock-solid safe they’re risk-free, US Treasury bonds have long been the first port of call for investors during times of panic. They rallied during the global financial crisis, on 9/11 and even when America’s own credit rating was cut…But this time may be different. As President Donald Trump unleashes an all-out assault on global trade, their status as the world’s safe haven is increasingly coming into question…Yields, especially on longer-term debt, have surged in recent days while the dollar has plunged,” reported David Rovella of Bloomberg.

The Federal Reserve (Fed) soothed the market

On Friday, Minneapolis Fed President Neel Kashkari and Boston Fed President Susan Collins both discussed ways the Fed can “manage a dislocation, or pricing disruption, in the Treasury market…[the moves] are instruments designed to keep markets running smoothly by making sure there is enough liquidity, meaning financial institutions have access to the short-term funding they need to operate,” reported Nicole Goodkind of Barron’s.

Markets were soothed by the assurance that the Fed stands ready to “keep financial markets functioning should the need arise,” reported Stephen Culp of Reuters. By the end of trading on Friday, major U.S. stock indices were in positive territory. Yields on longer maturities of U.S. Treasuries also finished the week higher.

WHAT DO YOU KNOW ABOUT MONEY? The United States began using paper money in 1690. The Massachusetts Bay Colony paid soldiers fighting military campaigns against the French in Canada with paper notes. “This was an emergency measure, but it turned out to be a solution to the long-term problem of building an economy without large reserves of precious metals. Eventually, all of the other colonies issued their own bills,” according to Smithsonian Education.

See what you know about the history of American money by taking this brief quiz.

1. Ben Franklin printed money for Pennsylvania, Delaware, and New Jersey. He often included images from nature, such as intricately detailed leaves. What was the primary reason Franklin included nature prints on notes?
   1. The visually pleasing notes attracted customers
   2. The prints symbolized the growth of the nation
   3. The prints symbolized money circulating through the economy
   4. The prints made Franklin’s notes difficult to counterfeit

2. When did the era of “lawful money” (the modern era) begin?
   1. In 1792, when the US mint was created
   2. In 1893, after a bank panic
   3. In 1913, under the 1913 Federal Reserve Act
   4. In 1936, when Fort Knox was built

3. United States currency is held as a reserve, and for trade, by many other countries. What percentage of our currency is held outside the United States?
   1. One quarter
   2. One third
   3. Two thirds
   4. Three quarters

4. Some denominations of U.S. paper money wear out faster than others. Which denomination has the shortest lifespan?
   1. A $1 bill
   2. A $5 bill
   3. A $10 bill
   4. A $20 bill

Weekly Focus – Think About It
“I find television very educating. Every time somebody turns on the set, I go into the other room and read a book.”
 –Groucho Marx, Comedian

Answers: 1) d; 2) c; 3) c; 4) b

Sources:

https://www.bloomberg.com/news/articles/2025-04-11/as-markets-sank-and-soared-a-new-fear-spread-across-wall-street or go to https://resources.carsongroup.com/hubfs/WMC-Source/2025/04-14-25-Bloomberg-As-Markets-Sank%20-%201.pdf

https://www.barrons.com/livecoverage/trump-tariffs-china-us/card/trump-tariff-pause-welcomed-by-world-leaders-but-china-tensions-mount-UP7utx6ARqUB3SJx2WaJ or go to https://resources.carsongroup.com/hubfs/WMC-Source/2025/04-14-25-Barrons-Trump-Tariff-Pause%20-%202.pdf

https://www.bloomberg.com/news/articles/2025-04-09/stock-market-today-dow-s-p-live-updates?srnd=phx-markets or go to https://resources.carsongroup.com/hubfs/WMC-Source/2025/04-14-25-Bloomberg-S&P-500-Tumbles%20-%203.pdf

https://www.investopedia.com/terms/s/safe-haven.asp

https://www.morningstar.co.uk/uk/news/263357/us-treasury-bond-yields-jump-as-trade-war-calls-safe-haven-status-into-question.aspx

https://www.bloomberg.com/news/articles/2025-04-11/us-treasury-selloff-is-worst-since-repo-market-chaos-in-2019

https://www.bloomberg.com/news/newsletters/2025-04-11/china-ups-the-ante-in-trump-s-trade-war-evening-briefing-americas?cmpid=eveus&utm_medium=email&utm_source=newsletter&utm_term=250411&utm_campaign=eveus or go to https://resources.carsongroup.com/hubfs/WMC-Source/2025/04-14-25-Bloomberg-China-Ups-the-Ante%20-%207.pdf

https://www.barrons.com/articles/fed-treasuries-bond-market-yields-stocks-5aaf4f24 or go to https://resources.carsongroup.com/hubfs/WMC-Source/2025/04-14-25-Barrons-Fed-Knows-How-to-Stabilize%20-%208.pdf

https://www.reuters.com/markets/us/us-stock-futures-fall-china-strikes-back-with-steep-tariffs-2025-04-11/

https://www.barrons.com/market-data?mod=BOL_TOPNAV or go to https://resources.carsongroup.com/hubfs/WMC-Source/2025/04-14-25-Barrons-DJIA-S&P-Nasdaq%20-%2010.pdf

https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value_month=202504

https://www.smithsonianeducation.org/educators/lesson_plans/revolutionary_money/introduction.html

https://www.uscurrency.gov/sites/default/files/media/podcast/noteworthy-podcast-3-transcript-en.pdf

https://www.federalreserve.gov/faqs/money_15197.htm

https://www.investopedia.com/terms/f/1913-federal-reserve-act.asp

https://www.uscurrency.gov/about-us/currency-facts#

https://www.federalreserve.gov/faqs/how-long-is-the-life-span-of-us-paper-money.htm

https://www.goodreads.com/quotes/tag/humor