Bulls Count Blessings After U.S. Stocks Eke Out Gain in First Half

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However paltry the S&P 500’s return in the first half of 2018, at least it rose. Going by history, it’s a signal the rest of the world’s equity markets may be able to take solace in.

Books have closed on a tumultuous six months that saw volatility surge amid trade wars and a faster-moving Federal Reserve. But while the going got rough, including twin routs in February and March, U.S. stocks avoided disaster as earnings showed no sign of unraveling.

The 45-point gain in the S&P 500 left it in an unusual spot relative to other markets, according to an analysis by Sundial Capital Research. The index sits about 8 percent above its lowest point of the last 200 sessions, while MSCI World Excluding United States Index is stuck near its nadir.

Every time that’s happened in the past, it’s been good news for global equities over the next two months. “The suggestion is that world stocks aren’t going to drag the S&P lower, rather the S&P is going to pull them higher,” wrote Jason Goepfert, the firm’s founder.


For investors, various conclusions flow. One, that with more than a third of the world’s market value, American stocks remain more likely to lead global equities than follow them. Another is that as safe as it may seem at home right now, U.S. traders may be wise to consider diversification strategies that look past their own border.

“It’s hard for many people to remember a time when growth or tech stocks or U.S. stocks or small cap stocks weren’t leading the market,” said Jeffrey Kleintop, chief global investment strategist at Charles Schwab, said in an interview at Bloomberg’s New York headquarters. “We always talk about the importance of diversification and we stress it. Now we’re really pounding the table.”

Of late, U.S. stocks have been the place to be. Even as they fell 1.3 percent over the last five sessions, the still eked out a quarterly return that was 4.7 percentage points better than the MSCI rest-of-world index, the most since 2014. Global stocks are having a harder time as trade threats bite, China stocks plunge and European investors sell amid uncertainty over monetary policy.

But the U.S. market continues to show signs of late-cycle angst and investor tastes shift. Tech stumbled this week, losing the most in 14 weeks as the White House moved forward with plans to limit Chinese investments to the sector. Defensive industries led, with gains in utilities, telecommunications and real estate. Small-caps, seen as more tied to the domestic economy than their bigger brethren, fell for the first time in nine weeks.

Investors rotated more generally from stock to cash. They yanked $29 billion from global equity funds and put about $27 billion into money market funds this week through Thursday, EPFR data showed.

“Investors are probably saying, ‘I’ll have my 2.5 percent coupon and not worry about trade, China and geopolitics,” Dennis Debusschere, head of portfolio strategy at Evercore ISI, said in an interview at Bloomberg’s headquarters.


Valuations increasingly favor overseas investments. A 5.9 percent drop in emerging markets in the past three weeks left them trading at 11 times projected earnings, compared with 16.3 times for the S&P. The U.S. is scheduled to impose tariffs on $34 billion of Chinese goods next week. Chinese authorities has said they will slap tariffs on an equal value on U.S. exports including agricultural and auto exports.

“While political uncertainty, threats of a trade war, hostile rhetoric and bullying U.S. manufacturers are not necessarily supportive of equities, we believe markets have largely over-reacted, as $800 billion of equity market cap has been lost in the past two weeks,” said Tom Lee, co-founder of Fundstrat Global Advisors.

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