“In the stock market, the most important organ is the stomach. It’s not the brain.”
– Peter Lynch

Bottom Line Upfront: Markets continue to be tormented by the U.S.’ increasingly emerging market-like public policy instability.

• We see the “Sell America” market reaction gaining momentum as pressure builds on the dollar, equities, and Treasurys.
• Recession risk in the U.S. is clearly elevated, with the combination of fiscal tightening, tariff shocks, and Fed hesitancy forming a toxic mix.
• We believe the path for equities, especially large cap growth, remains lower over the coming months, and we prefer exposure to gold and tangibles-related equities. Of course, tariffs can be negotiated down and the Fed can re-engage, but we view this as a less likely outcome.
• We don’t see a resolution to the self-inflicted tariff panic anytime soon as this is now a political-ideology-driven move that won’t stop until we have a negotiated resolution, or something breaks.

As if the tariffs weren’t enough, the markets are now panicked by the potential removal of Jay Powell, a move that could trigger a Liz Truss-style bond market reaction in the U.S. The President’s messaging has awakened a “Sell America” market reaction with U.S. stocks, bonds and the dollar all declining*. What’s unfolding resembles classic emerging market dynamics, with policy risk dominating and institutional credibility eroding. This has led to global diversification finally mattering again after being dormant for 15 years.

What seems clearer is that the fiscal dominant environment of the past several years has resulted in unsustainable deficit levels that need to be addressed. Markets are no longer responding predictably to policy easing – a warning sign: The bond market is growing increasingly uncomfortable about rate cuts, as evidenced by the Fed’s 50 bps move in September that sent long bond yields higher, not lower.

Faced with costly tariffs, fiscal tightening and a reluctant Fed fearful of sticky inflation, the U.S. economy is flirting with a recession. While not a certainty, as tariffs can be negotiated to a manageable level and the Fed could re-engage to support the market, the risks have indeed risen over the last couple of months. The longer uncertainty persists for corporations, the greater the risks the economy jams up later this year.

For risk assets, this spells trouble, especially for U.S. large cap growth stocks. With valuations still rich and macro risks rising, these names are likely to remain under pressure and in our view the buy-the-dip crowd will continue to get burned as the path for the next several months is likely down. We believe that in the current environment, tangibles exposures in mining, oil, gas, copper and uranium in sectors like materials, energy and industrials, both in the U.S. and overseas are looking attractive. Especially since these areas have already priced in much of an economic slowdown and trade at valuations that provide somewhat of a margin of safety. Meanwhile gold, the King of the Tangibles, continues to march higher, reaffirming its role as the tier 1 geopolitical and haven asset it has been for millennia.

The Truss episode is a useful illustration and not a forecast. US and U.K. market structures, central bank frameworks, and reserve currency dynamics differ materially.