Investors are turning to U.S. stocks to avoid more turbulence overseas

Investors around the world are piling into U.S. stocks even as they brace for the prospect of a tough fall, because they say there’s nowhere better to hide from the turbulence in global markets.

“The US looks the least challenged in a very challenging world,” said Christopher Smart, chief global strategist at Barings and head of the Barings Investment Institute. “Everyone is slowing, but the U.S., because of the continued strength of the labor market, still seems to be slowing more slowly.”

Investors have added money to stocks and mutual funds focused on U.S. stocks in four of the past six weeks, according to data from Refinitiv Lipper, while pulling money out of international stock funds for 20 straight weeks. This is the longest streak since a 22-week streak of outflows that ended in October 2019.

Behind the conviction of investors in the US market? A belief that even if there is a recession, the downturn is unlikely to be deep or prolonged. Consumer spending remains resilient even though inflation pushes prices up. And some of that price pressure already seems to have peaked. So much for the labor market continues to look healthy as well.

The S&P 500 has outperformed major stock indexes in Europe and Asia since hitting its low for the year in mid-June. The US benchmark has risen 7% since June 16, while the pan-continental Stoxx Europe 600 added 3.3%, Japan’s Nikkei 225 advanced 4.6% and Germany’s DAX gained less than 0.1%. The Shanghai Composite fell 3% over the same period.

This week, investors will be poring over service sector data and the so-called beige book, the Federal Reserve’s periodic compilation of business anecdotes from around the country, for clues about the market’s trajectory. They will also be watching the European Central Bank’s monetary policy meeting, where the bank is again expected to raise interest rates.

Investors seem to have found solace from Friday’s jobs report, at least initially. The US economy added jobs at a solid but slower pace in August. The data, which was largely in line with expectations, appeared to hit a sweet spot: A too-strong report may have given the Fed more determination to keep raising rates, while a weak one may have indicated the economy is closer to a meltdown in recession.

The summer rally in US stocks has begun to falter after the Fed signaled its intention to tame inflation by sharply raising interest rates, even if this leads to an economic slowdown. The S&P 500 has fallen for three straight weeks, bringing its year-to-date losses to 18%.

Meanwhile, the US dollar, considered a haven for investors around the world, jumped to a 20-year high. There is that dragged down other world currencies– including the Japanese yen, the euro and the British pound – to their weakest levels in decades. When the dollar appreciates, it makes equity returns more attractive compared to domestic securities.

Jerry Braakman, president and chief investment officer of First American Trust in Santa Ana, Calif., said he’s looking for safety in the U.S. government bond, cash and defensive stocks sectors this year. It does not want to increase its exposure to international capital, such as in emerging markets, China, Japan and Europe in the near future, he added.

“There are scarier places than the US,” he said.

Global fund managers seem to be making similar bets, according to recent research from

Bank of America corp.

Just 34% of respondents in August said they were underweight European Union stocks, while a net 10% were overweight US stocks. This is a reversal from January, when a net 35% was overweight EU stocks and a net 5% overweight US stocks.

Among the challenges in Europe: Supply shortages from the war in Ukraine led to a sharp rise in gas and electricity prices. Adding to those concerns, Russia’s Gazprom PJSC said Friday it would stops the Nord Stream gas pipeline to Germany, raising the stakes for European governments trying to avoid energy shortages. Analysts are warning of a potential energy crisis this winter on the continent, which could lead to even higher inflation.

Already UK consumer prices rose 9.4% in June from a year earlier, the fastest increase for a Group of Seven economy the global boom started early last year.

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To combat the threats of inflation and slowing economic growth, The European Central Bank raised interest rates by a larger-than-expected half-percentage point in July, ending the bloc’s eight-year experiment with negative rates. Many economists expect the bank to repeat the move this week.

China also faces struggles. The the world’s second largest economy is struggling with the economic impact from Covid-19 outbreaks, a slump in real estate, increased regulation of tech companies and bad weather. That hurt everything from manufacturing activity to Chinese tech stocks — shares of

Tencent Holdings Ltd

and

Alibaba Group Holding Ltd

both are down about 11% since mid-June.

Weakness in China, of course, spells trouble for economies around the world. Multinational companies depend on Chinese demand for a range of goods from goods to smartphones to coffee for profit growth.

Shares of Tencent have fallen about 11% since mid-June as China grapples with the economic impact of Covid-19 and a number of other factors.


picture:

Qilai Shen/Bloomberg News

Despite these obstacles, some investors are still bullish on foreign stocks, pointing to their lower valuations after years of outperformance of US stocks. The Stoxx Europe 600, for example, recently traded at 11.47 times its projected earnings over the next 12 months, according to FactSet, compared with 16.89 for the S&P 500.

Dan Tolomei, chief investment officer at Trust Company of the South, said he would consider adding exposure to international stocks if U.S. valuations continue to rise.

“The international market is more attractively priced, we would expect better returns from the international market going forward,” he said.

Write to Hardika Singh at [email protected]

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