Heightened political risk might become the backdrop for U.S. stocks for the foreseeable future. January saw the U.S. attack Venezuela and President Donald Trump attempt to annex Greenland , threatening new tariffs on eight European allies. By the end of the month, the Abraham Lincoln Carrier Strike Group was sailing toward Iran after Trump signaled possible military strikes against the Islamic Republic, and the president was vowing to impose 100% tariffs on Canadian goods if Prime Minister Mark Carney made a trade deal with China. The tumult has strained the U.S. relationship with key allies in the European Union , Britain and Canada . But for investors, fresh attention is being paid to assets outside the U.S. in an environment where questions are raised about the reliability of longstanding, postwar alliances. Stocks in developed and emerging market countries alike outperformed U.S. equities in January. While the S & P 500 added more than 1%, the iShares MSCI Emerging Markets ETF (EEM) jumped about 8% in dollar terms, and the iShares Core MSCI International Developed Markets ETF (IDEV) gained more than 4%. The iShares MSCI ACWI ex U.S. ETF (ACWX) added more than 5%. ‘Source of uncertainty’ “It has become just a massive source of uncertainty,” Stephen Kolano, chief investment officer at Integrated Partners, said of U.S. strategic policy . “Not only are you seeing that potentially in terms of a risk premium, but I think there is more of a mental risk premium in terms of trade routes and diplomacy that, at least for the next three years, now you’re like, ‘We don’t know what the next thing coming out of the U.S. is going to be.’” Money managers suddenly find themselves taking account of the recent EU-India free trade agreement , called the “mother of all deals,” by European Commission President Ursula von der Leyens of Germany. Meanwhile, U.S. relations with Europe are at their “lowest moment” since NATO’s founding , according to remarks last week by her predecessor, former European Commission President Jose Manuel Barroso of Portugal. “The U.S. backing away from NATO, backing away from coming to the aid of allies, etc. – at least figuratively – it’s now forced other countries to say, ‘Okay, we need to get our own house in order,’” Kolano said, pointing to NATO members pledging to spend 5% of gross domestic product on defense by 2035. Security arrangements “will not return to just, ‘Hey, the U.S. takes care of everybody.’ That ship has sailed.” As a result, flows of capital once dominated by investments into and out of the U.S. are being reshaped. “Now it’s starting to disperse,” said Kolano, whose firm manages about $24 billion. Getting out of the greenback U.S. assets, including the dollar, were hit hard in the wake of Trump’s tariff threat over Greenland, renewing the “sell America” trade and reviving safe-haven assets such as gold. The greenback dropped more than 1% in January and is 11% below its 52-week high, although it rebounded Friday after Trump nominated Kevin Warsh to serve as the next chair of the Federal Reserve. .DXY 1Y mountain Dollar index, one-year Trump has talked down the dollar’s weakness. When asked about currency’s value last week, he said that ” it’s great .” In reaction, the dollar slumped on Tuesday, suffering its worst day since last April. “Everything Trump’s doing around ICE raids, everything he’s doing on trade, everything he does [with] Greenland, all sets the stage for increased volatility,” said Lawrence McDonald, author of “The Bear Traps Report,” who once worked at Lehman Brothers and Morgan Stanley. Trump’s Greenland-related tariff threat ushered in a “third wave” out of the dollar after Russian assets were frozen in 2022 following the invasion of Ukraine, and Trump imposed sweeping tariffs in April 2025. The new tariff regime Trump announced last April led global investors to shift their tone on U.S. assets, even as domestic retail investors drove a recovery in stocks after a big selloff, said Dario Perkins, managing director of global macro at TS Lombard. Overseas investors, by contrast, were nervous about adding further to dollar-denominated assets, and debated hedging against the currency’s decline, he said. Danish insurance companies and pension funds, for example, increased their hedges on U.S. dollar investments to about 74% in April 2025 from almost 68% the month before and close to 62% at the start of the year, according to the Danish central bank. Although there’s presently no “mass exodus from dollar assets,” there’s certainly a “reluctance to have dollar exposure,” Perkins said, noting “another round of hedging which has made the currency weaker” over the past couple of weeks. In the past, there was a “perception that the dollar would give you another layer of insurance and that the dollar would appreciate” when money managers reduced risk, he said. “What’s troubling investors is that they’ve now seen these two instances where those correlations have broken down and, in fact, completely flipped.” More to come? Even after the end of Trump’s second term in January 2029, Paul Christopher of Wells Fargo Investment Institute believes that geopolitical risk could stay elevated. “A hedge is likely to continue to some degree,” said the firm’s head of global investment strategy. The dollar is likely to continue to weaken, said Marko Papic of BCA Research, leading to further diversification into areas that are “a little cheaper.” The macro and geopolitical strategist likes European, Chinese and Japanese equities. “The S & P 500 can absolutely crush every year, but if the currency falls by … double digits every year, you definitely want to be non-U.S.,” Papic said. Rather than a “sell America” trade, investors should instead consider a “buy the rest of the world” trade. “Take a dart, throw it at a map, buy those assets,” he said. To be sure, money managers’ attitudes toward U.S. assets and volatility will vary depending on their country’s integration with the U.S., be it economic or military. Even between the U.S. and Europe, however, where relationships are closely intertwined, the latest rift will “never be fully repaired,” said Matthew Aks, senior strategist for international political affairs and public policy at Evercore ISI. Asian allies, however, could have “a little more of an instinct to hope that this policy volatility is just a phase that passes.” “Large pension funds in Japan, which are huge international investors, I don’t know that they would look at the ‘sell America’ trade in the same way that others would … given the full extent of security ties that exist between the United States and Japan, and have for many years,” he said. Yet another potential risk to how U.S. assets are viewed abroad may come from threats to the independence of the Federal Reserve. Aks expects the next central bank chair could add to policy volatility and raise questions as to whether asset prices adequately reflect any added political risk premium. If approved by the Senate, Warsh, a Federal Reserve governor under former Presidents George W. Bush and Barack Obama, would start his term in May. Gold and silver prices plummeted Friday as markets saw Warsh as independent of Trump and committed to fighting inflation if it flares up again. “When you layer on the Fed transition becoming real, that is … another very serious vector for these sets of concerns about U.S. political risk to sort of play out,” Aks said.
