It’s a pretty simple story this week as the on-again, off-again tariffs have injected uncertainty into the markets and driven US stock indices lower.  Overseas stocks, specifically European markets, have held up particularly well.  February showed a sharp divergence between US S&P 500 (blue), US Nasdaq (green), and overseas (red) stocks.

In response to the Trump administration’s attitude toward global trade and defense, several global leaders have responded with talks of “getting their house in order.”  This includes a renewed focus by some on their domestic economy (as opposed to exports).  European countries, such as Germany, are committing to spending more on defense, which is seen as an economic stimulus.  In 2023, just 10 of NATOs 30 countries were spending 2% or more of their GDP on defense.  Now, 23 of NATOs 31 countries are meeting the 2% goal.

There’s also some nervousness among global investors that US exceptionalism may have been overplayed.  While the US economy and markets are certainly exceptional in many ways, the amount of capital drawn to US markets over recent years may have gone too far.  The US has 4.2% of the world’s population and the US economy is roughly 26% of the global economy.

Yet, the US stock market now represents nearly 70% of the global stock market.  That is to say, of all the money in the world invested in stocks, almost 70% of it is invested in US stocks.

Some global investors are voicing concerns that they may have become overly-concentrated in the US markets.  Adding to the uncertainty, the US stock market itself may be overly-concentrated in too few  companies as 38% of the money in the US stock market is now invested in just 10 companies.

So it wouldn’t be unusual, or unhealthy, to see some of the money that’s become very concentrated in the US stock market to move to other attractive opportunities in US markets and abroad.  It’s still too early to say this is the beginning of a bigger unwinding process, but it certainly brings the risks of concentration into focus and makes a good argument for diversification.

 

Have a great weekend.

 

Jack C. Harmon II, CFP^®, CIMA

Principal, Harmon Financial Advisors

Registered Principal, Raymond James Financial Services

 

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