What a difference a few weeks, or even days, makes. In a major pivot, the U.S. administration went from proposing sweeping tariffs across many of its trading partners to then extending a three-month reprieve for all countries. The exception is China, where tariffs have since risen meaningfully. Previously announced tariffs impacting the auto sector, steel and aluminium remain in place, while new exemptions for some electronics have been granted. The shift in approach has led to some respite from the big market swings experienced recently, but uncertainty remains elevated. Moreover, the “risk-off” backdrop that traditionally comes in a period of market uncertainty has turned into a “U.S.-off” environment. The term, coined recently by an interest rate strategist at RBC, refers to the simultaneous weakness seen in U.S. stocks, government bonds, and the U.S. dollar. We explain below.

The U.S. stock market has struggled this year. The weakness has been observable across small, midsize, and “large cap” stocks. Many sectors except a few traditionally defensive ones, have also been weak. And while global stocks have had challenges too, U.S. stocks have underperformed many other developed markets. We attribute this underperformance to a fundamental issue that tends to catch up to stock at some point: elevated valuations. The U.S. stock market entered this year at a forward Price to Earnings multiple of well over 20 times versus its historical average of closer to 16 times. Investors had come to expect strong growth from the U.S. stock market and were particularly enthralled with the earnings potential driven by capital spending tied to generative artificial intelligence. That left investors with very high expectations for future growth, which has now come into question. It is not surprising that technology-related pockets of the U.S. market have been among the weakest year-to-date.

Weakness in the stock markets is par for the course during periods of uncertainty. More surprising has been the behaviour in the U.S. government bond market in recent weeks. Bond yields tend to fall (and bond prices rise) when investors are seeking the relative safety and comfort offered by bonds, and in particular government bonds. But in and around the time of the U.S. government’s policy pivot, longer-term U.S. government bond yields rose (prices fell) relatively sharply. This suggests some investors were selling. There is no way of knowing for sure, but some of the pressure can be attributed to potential deleveraging in the institutional and hedge fund community and potential selling by foreign investors, including central banks. Bond yields have moved lower more recently suggesting this could have simply been a temporary anomaly, but it bears watching, nonetheless.

Finally, the U.S. dollar. It too has often been a beneficiary during periods of market stress. But this time around it has failed to live up to that reputation. It has been weak all year and has continued to decline during the past few weeks with other major currencies such as the Canadian dollar, euro, Japanese yen, Swiss franc, and pound sterling sitting at year-to-date highs and some even at multi-year highs relative to the U.S. dollar. The U.S. dollar weakness this year reflects investor concerns and questions that have surfaced on a number of fronts, including the trajectory of U.S. economic growth, potential for global investors to rotate out of U.S. assets, unpredictable and erratic government policy, and the sustainability of the U.S. fiscal position.

The U.S. may always play an important role in our investment portfolios because of the sheer depth of the opportunity set presented by its stock and bond markets. But we are open to the possibility that longer-term trends could be changing, as they have in the past, and other markets, sectors, and currencies could be important drivers of future performance. We welcome that possibility and will continue to spend time assessing opportunities for our clients and their portfolios.