Investors are returning to US stocks, betting that the domestic stock market will be able to withstand new economic headwinds better than other parts of the world.
The US, by contrast, is less dependent on Russian oil, and the number of hospitalized Covid-19 patients has dropped significantly. And many investors believe that the US economy has entered the geopolitical turmoil of recent weeks in a strong enough form to withstand the surge in oil prices and increased anxiety caused by Russia’s invasion of Ukraine.
The S&P 500 gained 6.2% last week, its best performance since November 2020 after the Federal Reserve raised interest rates for the first time since 2018. The index is now up 5.6% after Russia’s invasion of Ukraine and has reduced its annual loss to 6.4%.
The recent rally extends years of US dominance. The S&P 500 has quadrupled since the start of 2010, while the MSCI index, which tracks stocks outside the US, has risen about 30% during that time.
Most recently, the German DAX fell 1.5% after the Russian invasion on February 24th. The Shanghai Composite fell 6.8% and the Hong Kong Hang Seng fell 9.5% over the same period.
“The US is a safe haven in an increasingly insecure world,” said Jim McDonald, chief investment strategist at Northern Trust, which had $1.6 trillion under management at the end of 2021.
This week, investors will be waiting for Fed Chairman Jerome Powell’s speech on Monday for more details on the economic outlook. They will also analyze earnings reports from Nike Inc., General Mills Inc. and Darden Restaurants Inc. to assess consumer strength in the US.
The US is a refuge in an increasingly insecure world.
— Jim McDonald, chief investment strategist at Northern Trust.
US energy and agricultural production is helping to insulate them from the recent rise in commodity prices, Mr. McDonald said, while a strong US labor market should support the domestic economy. Northern Trust has been buying US shares and selling shares from other parts of the world over the past month, he said.
The Chicago firm is not alone. Investment managers have shifted their appetite for regional equities in recent weeks, loading up on US equities and lowering European equities. The net percentage of respondents to a global survey of fund managers by BofA Global Research who said they were overweight in U.S. equities jumped 27 percentage points from February to March, returning the country’s equities to a net overweight position in the survey.
Darden Restaurants, the parent company of Olive Garden, plans to release quarterly results this week.
Photo: Chet Strange/Bloomberg News
Abroad, things were different, with the share of respondents who were overweight in eurozone equities falling 48 percentage points to the region’s biggest negative since July 2012. Emerging market stocks, Japan and the UK also declined in preference.
The conflict in Ukraine is expected to hit the European economy as it strains supply chains and raises the cost of energy and goods for households and producers. Europe’s economic recovery has been less robust than in the US, even before Russia’s invasion of Ukraine.
Atlanta-based asset manager Homrich Berg is considering cutting its holdings in international equities and switching to short-term bonds because of the risk of economic slowdown outside the US, chief investment officer Stephanie Lang said.
“We don’t see a recession risk in the US,” she said. “We are starting to see an increased risk of recession around the world. There is a split.”
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To be sure, some investors say that even with heightened geopolitical volatility, overseas equities are trading at a sufficiently large discount to US equities to merit attention. The S&P 500 last week traded 19.2 times its projected earnings over the next 12 months, according to FactSet. The German DAX had a forward ratio of 12.7, while the Hang Seng traded at a 10.1x projected profit.
“I think at this point most of the risk is actually priced in international markets,” said Ben Kirby, co-head of investment at Thornburg Investment Management.
In recent weeks, Thornburg has increased its positions in Dutch insurance company NN Group NV and French oil and gas company TotalEnergies SE in recent weeks, he said.
U.S. equities posted their biggest five-week gains in the week ending Wednesday, while emerging market equities posted their first outflow since December and European equities posted a five-week outflow, according to BofA Global Research’s analysis of EPFR Global data. .
The US accounts for about 60% of the MSCI ACWI All Cap Index, one of the indicators of the global stock market.
Trade was volatile in the US as well as abroad. Both the S&P 500 and the Dow Jones Industrial Average suffered their first corrections — down at least 10% from their recent high — in two years. The Nasdaq Composite entered a bear market, falling 20% or more.
However, many investors seem to be using these pullbacks as a buying opportunity. BofA Securities said clients have been buying dips and favoring consumer discretionary and consumer goods stocks lately.
The most profitable sectors in the S&P 500 over the past month are energy stocks, which benefit from higher oil prices, and utilities and healthcare stocks, which investors often turn to when they fear the economic outlook.
Shares of Chevron Corp. up 21% in the last month, while shares of drug maker Eli Lilly & Co. rose 20%, while shares of utility company NextEra Energy Inc. rose by 11%. Other strong performers are supermarket company Kroger Co., which moved up 22%, and trucking leader JB Hunt Transport Services Inc., which climbed 14%.
Email Karen Langley at [email protected]
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