Is the U.S. still a safe haven?

It has been more than a month since we interviewed John De Goey, a portfolio manager at Designed Wealth Management in Toronto, about the financial repercussions of the U.S.-Israel war on Iran. The fact that his commentary — recorded for the Canadian Advisor.cast — sounds prescient five weeks later says a lot about De Goey, and how far sideways the campaign has drifted.

“I don’t think the war in Iran is going to end anytime soon,” De Goey said on May 5.

De Goey’s forecast came in the context of a larger question, about the long-standing reputation of the U.S. economy as a safe haven for global investors. There are multiple reasons why the U.S. has earned this reputation. Its government bond market is the world’s most liquid. Its dollar is the world’s reserve currency. Its institutions and rule of law have, until recent years, held firm.

This unique global standing makes U.S. Treasuries the go-to investment when geopolitical risks rise, even when the U.S. is the political power responsible for triggering the uptick in risk.

“Many people underplay the correlation between what goes on on Capitol Hill or Parliament Hill, and what goes on on Bay Street or Wall Street,” De Goey said.

“There is so much concern about the risks associated with the Trump administration and how volatile it is. It would be folly, in my opinion, to act as though things are normal and not show some caution with regard to the risks associated with having such a volatile person as a head of state.”

De Goey earned a degree in political studies at the University of Guelph and a graduate degree in public administration at Carleton University before launching his financial services career. It’s a background that provides him with a perspective not many portfolio managers have.

“I’m genuinely worried that the world is going into a dark place in the not too distant future,” he said.

Meanwhile, De Goey believes that U.S. equity valuations are unsustainable.

“The U.S. market is extremely expensive based on historical metrics,” he said. “If you think about the internet boom, 25 or 30 years ago, it was the same sort of thing. … At some point, it becomes difficult to justify those valuations and things come back down to earth when people realize that we’ve reached the limits. I think we’re getting close to that with AI.”

The cyclically adjusted price-earnings ratio for the S&P 500 Index is in the 40–42 range currently. At the height of the dot-com bubble in 2000, it was 44.

Meanwhile, a growing number of economists, central bankers and market strategists argue that inflationary pressures are baked into outlooks for the remainder of this year. Forecasts from RBC, TD, the OECD and others are on record.

“There are supply chain disruptions and inflation baked in,” De Goey said. “They’re unavoidable, even if the war ends immediately. Despite that, markets are hitting new all-time highs.”

There’s “a disconnect,” De Goey said, between efficient-market theory and equity valuations.

Don’t count out stagflation either, he said. “The last time we really had stagflation was in 1979 because of — wait for it — problems with Iran.”

We’ve been here before. “It happened in the 1800s with railways,” De Goey said. “It happened at the turn of the millennium with dot-com. And I think it’s happening again right now. I don’t know when the music’s going to stop. I think we’re getting close.”

As unnerving as the current state of affairs is, the U.S. will continue to be seen as a safe haven to the extent that the greenback will remain the world’s reserve currency and the market for U.S. Treasuries will remain robust. What is much less clear, however, is whether U.S. equities remain a safe bet, at least in the short to medium term.

“Advisors should be telling clients that there’s a lot of risk in markets in general, and the U.S. stock market in particular,” De Goey said. “You should be finding ways to diversify your portfolio away from those things that have done very well.”

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