Investment Review №339. Playing Defense

The Q4 2025 GDP report released on Friday, February 20, missed expectations. Against a consensus of 2.8% QoQ annualized, growth was just 1.4%, reflecting the impact of the government shutdown. In this context, and given renewed uncertainty around tariffs, the S&P 500 has eased about 0.5% over the past month.

Calls for selling U.S. assets (equities, bonds, the dollar, etc.) have grown louder. But there are some nuances. The main driver of the GDP miss was a sharp drop in government spending: more than 5% QoQ annualized, led by a decline of over 16.5% in federal expenses due to the shutdown. New data may suggest higher spending, which should bolster consumption and, in turn, the pace of growth. The Atlanta Fed nowcasts GDP at 3.1%, and our internal estimate is even slightly higher at 3.2%—figures that are clearly not recessionary. The U.S. dollar index is down 8% over the past year, a move that helps the U.S. government adhere to its promise to grow exports and temper imports. A materially weaker dollar is unlikely, as it would erode Americans’ purchasing power—politically and economically costly. We see room for a tactical rebound in the dollar, though a return to all-time highs appears unlikely.

Lipper reports more than $50bn in net outflows from U.S. equities since the start of 2026—the heaviest net selling in the first eight weeks of a year since 2010—which fueled “Sell America” narratives. Yet recent headlines lacked context: Treasury data show net foreign purchases of U.S. equities and bonds totaled $1.55tn in 2025, up more than 30% YoY, including over $650bn in private equity purchases and more than $440bn in Treasury buying.

Even the popular claim that China is selling off Treasuries deserves scrutiny. Official Beijing’s holdings reportedly fell $76bn last year to a 17-year low of $683bn. However, data suggests a reallocation of foreign assets—including Treasuries—from the central bank’s balance sheet to state-owned banks. On paper, that reduces China’s exposure but does not entirely eliminate it.  

In summary, much like 2025, 2026 is expected to bring surges in volatility and shifts in market direction; nevertheless, sidelining the U.S. market would be a mistake. The market’s scale, depth, liquidity, and strong long-term return profile make it attractive even amid uncertainty.

This is especially relevant for investors who prefer a passive, hands-off approach. A straightforward implementation is an equal-weight allocation to ETFs tracking the major U.S. benchmarks: SPDR Dow Jones (DIA), SPDR S&P 500 (SPY), Invesco QQQ Trust (QQQ), and iShares Russell 2000 (IWM).