Introduction
Stories about the collapse of a longstanding ‘petrodollar’ agreement between the U.S. and Saudi Arabia spread like wildfire on social media. But the agreement never existed. Let’s dive into the myths surrounding the petrodollar. We will also explore how the spring market rally is setting the stage for a promising summer.
Why We Think the Spring Rally May Extend Into the Summer
The S&P 500 edged 0.6% higher last week for its eighth weekly gain in the last nine weeks. Historically, markets have rallied during the summer months of an election year when an incumbent is running. More than 30 new all-time highs in a year have seen an average gain over the year of nearly 20%. 2024 already has 31 new all-time highs.
The amazing bull market continues, and 2024 is turning into one of the best starts to a year ever. Considering the S&P 500 gained 25% last year, the approximately 15% gain so far this year is impressive. Election years usually aren’t this strong early on and tend to do better later in the year. For example, in 1976, the market added another 3% in the final six months after a strong first half.
One intriguing aspect is the historical trend of election years when an incumbent president is running. From mid-May to late September, stocks tend to perform well. Given the robust performance in May and June, with stocks up nearly 5% and 4%, respectively, this trend suggests that the summer rally isn’t over yet.
In years like 1997, which saw gains of more than 4% in both May and June, stocks gained another 10% for the rest of the year. Although the latter part of June historically tends to be weaker, the current momentum indicates that even a slight pause wouldn’t derail the overall upward trend.
Here’s a snapshot of 2024: After 118 trading days, there have been 31 new all-time highs, putting this year on pace for more than 66 new all-time highs. Looking at other years that saw at least 30 new ATHs, the market was higher every time by an average of 19.6%.
Petrodollar Panic: Much Ado About Nothing
Earlier this week, reports circulating widely on social-media platforms like X offered up a shocking proclamation: A 50-year-old agreement between the U.S. and Saudi Arabia requiring that the latter price its crude-oil exports in U.S. dollars had expired on Sunday.
Almost immediately, Google searches for the term “petrodollar” spiked to the highest level on record, dating back to 2004. But as speculation about an imminent end to the U.S. dollar’s global dominance intensified, several Wall Street and foreign-policy experts emerged to point out a fatal flaw in this logic: The agreement itself never existed.
The Real History: The United States-Saudi Arabian Joint Commission on Economic Cooperation
The agreement referred to by Donovan is the United States-Saudi Arabian Joint Commission on Economic Cooperation. It was formally established on June 8, 1974, by a joint statement issued and signed by Henry Kissinger, the U.S. secretary of state at the time, and Prince Fahd, the second deputy prime minister (and later king and prime minister) of Saudi Arabia.
The rationale for such a deal was straightforward: Coming on the heels of the 1973 OPEC oil embargo, both the U.S. and Saudi Arabia were eager to flesh out a more formal arrangement that would ensure each side received more of what it wanted from the other.
According to Donovan and others who emerged on social media to debunk the conspiracy theories, a formal agreement demanding that Saudi Arabia price its crude oil in dollars, never existed. Rather, Saudi Arabia continued accepting other currencies – most notably the British pound – for its oil even after the 1974 agreement on joint economic cooperation was struck.
Perhaps the closest thing to a petrodollar deal was a secret agreement between the U.S. and Saudi Arabia reached in late 1974, which promised military aid and equipment in exchange for the Kingdom investing billions of dollars of its oil-sale proceeds in U.S. Treasurys. The existence of this agreement wasn’t revealed until 2016, when Bloomberg News filed a Freedom of Information Act request with the National Archives.
Why the Dollar Will Likely Remain Dominant
The notion that the petrodollar system largely grew organically from a place of mutual benefit – rather than some shadowy agreement established by a secret cabal of diplomats – remains a matter of indisputable fact. This hasn’t stopped conspiracy theories about the origins of the petrodollar system from flourishing as far back as the 1970s.
To be sure, there have been some signs recently that the Saudis are more open to accepting currencies other than the dollar as payment for some of their oil sales. The Wall Street Journal has reported that the Saudis have been in talks with Beijing for years about accepting payment in yuan. But even if such an agreement were reached, Saudi Arabia’s close economic and military ties with the U.S. – and the fact that nearly the entire global system for financing, insuring, and transporting oil requires dollars – will likely continue to incentivize the Kingdom to continue seeking dollars as its preferred and primary form of payment.
The USD is unlikely to be dethroned from its top status anytime soon (probably not even in our lifetimes). Here are three key reasons why:
- Global Trade Dynamics: The U.S., China, and the EU dominate global trade. The U.S. imports much more than it exports, creating a global surplus of U.S. dollars. These dollars are then invested in the most liquid and deepest capital market in the world, the United States of America.
- Confidence in the U.S.: The world has confidence in the U.S. because of its deep and liquid financial markets, strong rule of law, property rights, and a history of enforcement. Despite the U.S. making up 25% of the global economy, about 60% of global foreign currency reserves are in USD. Although this has fallen from 71% in 2000, it remains far ahead of other currencies.
- Trade Invoicing and International Finance: The USD is dominant in trade invoicing and international finance. Outside of Europe, more than 70% of exports are invoiced in U.S. dollars. This dominance extends to international banking, where close to 60% of foreign currency banking claims are in USD. Foreigners like to borrow in dollars because of its stability, accounting for 62% of total foreign currency borrowing.
These network effects make it extremely hard to dislodge the USD from its dominant position. Any shift away from the dollar would be a long and slow process.
Market Outlook
The current market momentum suggests a strong outlook for the summer. The historical performance during election years, particularly when an incumbent is running, bodes well for continued gains. The significant number of new all-time highs indicates a robust market, supported by strong economic fundamentals.
However, investors should remain cautious about potential market corrections. The latter part of June has historically been weaker, and a short-term pullback wouldn’t be surprising given the recent gains. Yet, the overall trend remains positive, supported by strong earnings, stable economic indicators, and investor confidence.
Conclusion
In conclusion, the petrodollar myth is just that – a myth. While stories of its collapse may create temporary panic and sensational headlines, the fundamental economic realities remain unchanged. The U.S. dollar’s status as the world’s dominant reserve currency is underpinned by the strength and stability of the American economy, not by outdated or nonexistent agreements. As we move from a robust spring rally into what promises to be a dynamic summer market, it’s crucial to separate fact from fiction and base our investment strategies on solid information.
Stay informed, stay critical, and, most importantly, stay invested.
The Value of Holistic Wealth Management: At Advanced Wealth Management (AWM), we are dedicated to integrating personalized retirement planning, goal-based planning, and investment management with proactive tax, estate, and insurance planning. Our Boutique Family Office™ integrated service model addresses each client’s unique needs and objectives comprehensively. By staying current with financial regulations, economic trends, and market dynamics, we empower our clients to make informed decisions that enhance their financial well-being and secure their futures.
At AWM, our Fiduciary Duty Principles™ embody our commitment to transparency and integrity, ensuring you receive advice that aligns with your goals, not ours. This commitment sets us apart in a field where true fiduciaries are rare.
Knowledge is Power! Understanding the intricacies of the economy, markets, and broader financial policies is crucial—not just for staying informed but for taking control of your financial future. Knowledge equips you with the tools necessary to make strategic decisions, optimize your financial outcomes, and achieve financial freedom aligned with your life goals.
How Can We Help You? At AWM, we deliver proactive, comprehensive, and compassionate advice to individuals, organizations, and families. Our personalized solutions are tailored to meet each client’s unique needs, providing security and peace of mind.
Investment Management Explore our customized, globally diversified, tax-efficient investment portfolios designed to align with your financial plan and endure over time. Our Intelligent Allocation® technology dynamically adjusts to meet clients’ evolving needs in a fluctuating market environment.
Proactive Tax Planning and Management Explore innovative tax strategies designed to help you defer, reduce, and better manage your tax liabilities, with a focus on retirement and distribution phase planning.
Integrated Goals-Based Planning Incorporate all aspects of your life into a unified financial plan to navigate the optimal path to achieving your goals through any life event or transition.
Healthcare and Long-Term Care Planning Prepare for the future with comprehensive healthcare and long-term care planning that ensures you and your loved ones are well taken care of.
Social Security Optimization Maximize your Social Security benefits with our expert optimization strategies.
Estate & Legacy Planning Secure your legacy and ensure your estate is managed according to your wishes with our comprehensive services. We maintain strategic relationships with attorneys across 49 states.
First Step: Schedule Your Free Second Opinion Service Call Contact AWM today to schedule a confidential consultation and get matched with an advisor who can help you achieve your financial dreams.
Need Further Help? If you have any questions or need further assistance, please reach out to us at Service@awmfl.com.
Thank you for your continued trust and engagement.
Tony Gomes, Author, MBA
CEO and Founder
Advanced Wealth Management
Content Disclosure: The information provided here is general and educational and not a substitute for professional advice. It has been prepared solely for informational and educational purposes and does not constitute an offer or recommendation to buy or sell any particular security or to adopt any specific investment strategy. While we believe the information shared is accurate and reliable, we do not guarantee its completeness or precision. The insights may include forecasts, opinions, and discussions about economic conditions, market scenarios, or investment strategies, which are subject to change.
