Why the ‘Sell America' trade is over and government shutdown is just noise

The anticipated "Sell America" trend, triggered by April's tariffs, quickly reversed as foreign investors rapidly re-engaged with US markets, pushing Treasury holdings to record highs and equity allocations near peak levels. This resilience stems from the tariffs' muted effective impact, robust US corporate earnings, and the unique depth of its technology sector. Concurrently, the current government shutdown is largely dismissed as market noise, with historical precedent indicating minimal long-term market disruption, underscoring the US's enduring role as a primary destination for global capital despite political volatility.

Analysis

The narrative of a broad 'Sell America' trade, which gained traction in April following tariff announcements, has been invalidated by subsequent capital flow data. An initial, correlated sell-off across US equities, Treasuries, and the dollar proved to be a short-term reaction rather than a secular trend. Evidence shows that foreign capital, after a brief exit, returned decisively. Foreign holdings of US Treasuries increased 9% year-over-year to reach an all-time high in July, while foreign allocations to US equities are near record levels, composing over 30% of their financial asset mix compared to a long-term average of 19%. This resilience is attributed to two primary factors: the actual impact of tariffs was less severe than feared, with Citi estimating an effective rate of 9% versus the 18% headline figure, and the US market's structural advantages, particularly the unparalleled growth profile and depth of its technology sector, continue to attract global investment despite high valuations. Similarly, the current government shutdown is being interpreted as market noise, consistent with historical precedent where such events, including the 35-day standoff in 2018 during which the S&P 500 gained over 10%, did not trigger a market downturn or recession.

Key Decisions for Investors

• Investors should consider maintaining long exposure to US equities, as the rapid reversal of capital outflows and resilient corporate earnings underscore the market's fundamental strength, particularly in the technology sector.
• It is prudent to treat political noise, such as the current government shutdown, as a source of short-term volatility rather than a catalyst for a secular trend change, given historical data shows markets remain resilient through such episodes.
• Monitor Treasury International Capital (TIC) flow data as a key indicator, as the swift return of foreign buyers to US Treasuries and equities served as a primary counter-signal to the bearish 'Sell America' narrative.
• While the immediate threat has dissipated, remain cognizant of the primary risk factors for a genuine capital flight, including a significant erosion of fiscal policy credibility or a disorderly decline in the dollar.