Q4- January 2025
King Dollar and American Exceptionalism
Despite an economic picture that has been mixed in 2024, the phrase “American Exceptionalism” resurfaced in the headlines and among the opinion writers. While the economy is not the stock market, it is measurable and for more than a decade, US markets have consistently outperformed the competition¹, helping to support the “exceptional” title.
While this outperformance is largely grounded in fundamentals, one of the best single barometers of markets and measures of economics is the currency markets. In fact, many questions can simply be answered by looking at the US Dollar. Q, Isn’t the stock market very expensive? A, Yes, but the dollar is also hitting new highs as other countries lack the number of innovative companies, or they have even more structural problems or less growth. Q, Why is the deficit not sinking the economy? A, While it is a problem, investors and savers, foreign and domestic, still find more value in buying dollar based assets, which is allowing for the excess financing needed by Washington. Q, Won’t crypto currencies replace the loose fiat monetary systems and their printing presses? A, If that was the case, why is the US Dollar sitting at an all-time high relative to all other currencies.
To be clear, the strong dollar does not mean that the US does not have problems economically speaking, but it speaks to the relative attractiveness of the US and the companies and assets within it. Until the answers to the above questions change, even at the margin, it is hard to expect a major change in the economy and markets. There were signs of change in the economy during the early and middle months of 2024. Inflation and growth expectations, interest rates and the US dollar were slowing or falling, but each of those factors moved decisively higher in the fourth quarter. ISM Services PMI is a broad measure of the service side of the US economy which collective makes up more than ¾ of the total economy, The index had slowed in recent years, and flirted with 50 in mid-2024, only to jump to 54 in the final three months of the year, reflecting the bump in activity. Ironically, the turn began right around the time that the Fed first lowered their target interest rate.
The market and the economy are always a little mixed, which allows space for the two handed economist’s, “on the one hand…and on the other…” to always be partially right. While we try to avoid being two handed, it does seem like more people and businesses recognized that we have been in this awkward position where there were clear areas of weaknesses or uneasiness but also clear areas of abundance and optimism. Manufacturing and commodity related industries have been clearly weak, and housing turnover has slowed to a trickle, but government supported projects, the AI database construction boom and consistent consumer spending seem to be more than offsetting factors that are keeping this economy rolling. Stubborn levels of prices continue to weigh on many Americans despite low unemployment rates, while those with assets are sitting happy with higher stock and real estate values. The Fed embarked on the most aggressive shift in policy in decades, which pushed auto loan and credit card default rates higher, and history argued that a recession was on the horizon, but the higher rates have had very little impact on corporations as a whole given their abundance of cash flow and the locked in lower rates that many had secured². Elections mean change, and by the looks of several measures of sentiment, optimism is on the rise, at a time when activity in the US was already reaccelerating. Will political change be good for what has been working, will new leadership emerge domestically, or will other countries improve faster from this point?
Turning to the markets, signs of froth or excessiveness were clearly evident in 2021, with NFTs, SPACs, bitcoin and meme stocks. While the examples were many, individually they proved harmless. When these mini bubbles popped, most of us were not hurt or even noticed. In 2024, bitcoin is back in the news, and as it has become more accessible to Main Street (thanks to Wall Street) it has made another run higher in prices. In November, the value of all crypto currencies (Bitcoin plus the clear sham and celebrity sponsored tokens) equaled the value of all the companies within the Russell 2000 Index! The ETF giant Blackrock launched its bitcoin ETF in January. In just 11 months, it raked in more than $50 billion in assets, raising more money more quickly than any ETF ever before³. Within the equity market no single stock is talked about more than Nvidia (NVDA), which in October surpassed the market value of 5 of the G7 countries. With these dramatic surges of price and popularity, talks of bubbles have become more common AND the (possible) bubbles are much bigger this time.
The often quoted market commentator Howard Marks recently said, “When something is on the pedestal of popularity, the risk of decline is high. When people assume – and price in – an expectation that things can only get better, the damage done by negative surprises is profound” ⁴. He goes on to recount his experience watching investors pay high multiples for the Nifty Fifty of the late 60’s and early 70’s, only to see those market greats deflate over the next few years. It was not that these were bad companies, they just did not live up to the expectations ascribed to their stock prices. We are not calling the broader market a bubble, but we do know how markets work, how assets are valued, and what a bubble looks like. There are clearly securities and areas of the market where the level of confidence, optimism or lack of logic do not offer current investors what we would call a margin of safety; therefore, we are on “bubble watch” and we are mindful to not get hit.
One of the tenets to our approach to investing is that if we cannot reasonably assess the company’s value, or if the upside potential is simply not there, it does not qualify as a good investment idea despite how interesting the company might be. In other words, we do not want to buy or own an investment simply because it is popular, or it has been working. What is happening in the markets today is not new. Markets and asset prices do not always make sense, and our pulse on the economy is not always clear. There are areas where expectations look aggressive or ebullient, so we tread lightly, but there are also areas where sentiment appears more rational or even washed out, which creates more promising investment opportunities. We will never catch every rocket ship to a trillion dollars, but we work hard to find good investments where the idea is not already on a pedestal.
Tyler Pullen, CFA
Portfolio Manager
Chart source: FactSet. Past performance does not guarantee future results. Market conditions can vary widely over time and can result in a loss of portfolio value. In accordance with the rules of the Securities and Exchange Commission, we notify you that a copy of our ADV, Part 2A and 3 filings with the SEC is available to you upon request. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list.
¹ Can Trump Make American Exceptionalism Last? John Authers, Bloomberg, December 5th, 2024
² Reuters, High interest rates have benefitted corporate America, McGeever, August 15, 2024
³ BlackRock’s Bitcoin Fund Became ‘Greatest Launch in ETF History’, Sidhartha Shukla, December 30, 2024 ⁴ Howard Marks Memo, On Bubble Watch, January 7th, 2025