“Afloat” may not be the best word, since the US stock market is right about breakeven, year to date. On the other hand,

–EAFE (Europe, Australasia and the Far East), the index of non-US developed world markets) = +16%

–Japan = +8.3%

–Hong Kong = +18%, so far this year.

You may have to go back into the last century to see such relative underperformance of the US as we’ve experienced during this year so far.

I think the reason is pretty clear. It’s that investors who see the budget now being discussed in Congress understand that it won’t reduce the country’s outstanding $36 trillion in debt. Rather, the estimate of the Congressional Budget Office is that over the next half-decade the Federal government will not only spend all the money it collects in taxes and add another $3.6 trillion to what we now owe. Looking from a different perspective, Washington would need eight years of devoting every penny it receives to pay back creditors to–no other outlays–to be able to extinguish that debt.

The bond market is signaling that it thinks the risk the government will sooner or later default on a portion of that debt are rising. President Trump would reply that tariffs will cover the shortfall. Conventional economic wisdom would suggest that the tariffs will slow economic growth, adding to the debt problem, not shrinking it.

So it’s beginning to demand higher interest payments to offset this risk.

So far, most of this has been expressed through about a 10% decline in the value of the dollar vs the currencies of our trading partners. My experience, which is admittedly a bit dated, is that as prior funding crises have developed, US-based bond investors have taken the lead in pushing up rates. If someone forced me to guess, I’d say that a lot depends on the spending bill that comes out of the Senate.

There has already been a distinct stock market reaction to the Trump proposals, in two ways. The more significant is that the relative performance of sectors has been rearranged in favor of those less vulnerable to tariff harm. If we look at European markets ex currency gains, however, they are still about 8% ahead of their US counterparts. This is unusual.

Ytd through yesterday, the industry breakout of S&P returns are as follows:

Industrials +7.1%

Staples +5.3%

Utilities +5.3%

Financials +3.7%

Materials +2.1%

Communication services +2.1%

Real estate +0.6%

S&P 500 -0.7%

IT -2.8%

Energy -5.3%

Healthcare -5.3%

Consumer discretionary -6.9%

The big losers so far are Consumer discretionary, basically retail sales, and Healthcare, on the idea that many drugs and/or their constituents come from abroad, and consumers will pay at least part of the tariffs.

Energy is in the minus column both because of the domestic economic slowdown being set in motion by Washington and intra-OPEC squabbles about production levels.

Industrials are arguably a beneficiary of tariffs. Staples through Real Estate are arguably not hurt directly.