Sergei Karpukhin / Reuters
If an investor had fallen into a deep sleep for the past month, woken up this week, and checked his or her portfolio, the person might think many of the market’s primary risks had evaporated.
The S&P 500 is trading near its recent record high. That index is tracking for its best month since January, as is the Dow Jones Industrial Average. Investors just plowed the most capital into US equities in more than a year, flows data shows. The market’s “fear gauge” is muted.
All the while, equity strategists are skeptical Washington and Beijing can reach a meaningful resolution in their trade war with President Donald Trump and Chinese President Xi Jinping scheduled to convene in Japan this week. The global economy is slowing. Data suggests analysts’ expectations for companies’ future earnings growth is faltering.
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While some of the market’s internal behavior shows signs investors are skeptical the stock market’s rally can continue without a hitch, experts say investors appear to be ignoring threats looming over the rally.
“Can equity inflows continue in the face of falling bond yields and weak data?” Deutsche Bank strategists wondered in their weekly report on North American fund flows.
Investors poured $14 billion into US equities last week, the most since March of last year, the firm said. Those flows came as central banks, including the Federal Reserve, turned increasingly dovish and investors became incrementally more optimistic about the prospect of a US-China trade deal.
Still, investors essentially shrugged off meaningfully weak economic data that has been plaguing key US regions, like the Empire State Manufacturing Index posting its largest decline in nearly two decades and the Philadelphia Fed’s manufacturing metric falling to its lowest level in months.
Amid US stocks’ rally, some classically defensive sectors are showing signs investors are dubious about the market’s direction. Energy, financials, and industrials have all rallied strongly this month, Mike Wilson, the chief investment officer and chief US equity strategist at Morgan Stanley, said on Monday.
“That’s typically not a great sign, as it means the market is skeptical about something,” Wilson said on an episode of the firm’s podcast. “We think its skepticism is about growth — and it’s warranted.”
He added: “We are also skeptical about any trade deal between the US and China. While it does appear the two sides have become more open to further discussion, it’s not clear that an agreement can be made that will change the trajectory of growth.”
Others hold a bullish view on equities this year even as the data is proving soft and analysts’ earnings expectations for companies around the world are falling.
“There is a view out there that equities are way too complacent regarding the growth outlook in 2H, and that the recent rally is already pricing in a strong bounce in PMIs,” Mislav Matejka, a strategist at JPMorgan, said in a report earlier this week.
Matejka said investors could interpret a chart showing that the MSCI World Index has soared while global manufacturing has sunk as evidence that “equities are getting ahead of themselves.”
That’s not JPMorgan’s view, as the firm points out market leadership has been defensive. Still, it doesn’t discount the weak data that has been pouring in.
At the moment, stock investors are simply not pricing in the prospect of a trade-war escalation, UBS strategists and economists told investors in a report earlier this week.
Equities in the US initially reacted favorably to a Thursday report from the South China Morning Post that the US and China had reached a tentative “truce” in the trade war ahead of Trump and Xi’s planned meeting at the G20 summit — but the market gave up those early gains.
“The UBS Synthetic Trade War Monitor introduced in our last Q-Series report shows that the ‘market’ is less than halfway between complacency and last year’s peak fear levels,” UBS said.
“There are big differences across assets, though,” the firm said. “Rates … and industrial metals … are pricing high risks, while credit, currencies and equities are closer to complacency.”
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