With sensitive market indicators flashing danger signs, the appetite for safer assets is as high as ever
The continued strength of the U.S. economy has helped major U.S. stock indexes stay near record levels. But concerns on trade tensions and global growth are hanging thick in the air, propelling a continued rush among investors to snatch up safer assets.
“There are a lot of things happening at once and investors are not sure what to make of them,” James Bianco, head of Chicago-based advisory firm Bianco Research, told the Wall Street Journal.
Record lows in government bond yields, as well as the ballooning of the world’s global stockpile of negative-yielding debt to US$15 trillion, has come amid a surge in the price of rich-country securities since July. The Japanese yen, a go-to destination for anxious investors, has become the world’s best-performing major currency, and gold stands near a six-year high after outpacing the S&P’s double-digit 2019 rise.
“Shares of real-estate firms, consumer-staples companies and utilities are the only S&P 500 sectors to have risen in the past month,” the Journal said, noting that the sectors’ relatively stable earnings and sizable dividend payouts tend to find favour among investors during rocky periods.
The evidence so far is tilted toward continued economic growth rather than a slowdown to end the U.S. economy’s decade-long expansion, but portfolio managers are already hedging their positions in case a clearer picture of recession emerges. This week, expectant investors will pore over minutes from the Federal Reserve’s last meeting; the central bank is widely expected to continued interest-rate reductions to bolster the economy against trade tensions. Markets could also turn as Fed Chairman Jerome Powell issues comments at the central bank’s retreat in Jackson Hole, Wyoming.
While the White House said last week that it would push back some of its latest tariffs on Chinese imports until December, many see a potential months- or years-long continuation in trade uncertainty. Prospects for the future are also clouded by the impact of Brexit, simmering political situations in Italy, India, and Korea, and violent protests in Hong Kong.
In theory, declining interest rates are a short-term positive for stocks, which look more attractive in such a context. But many remain doubtful that it would result in a pickup in economic activity, and others see the global build-up of negative-yielding debt, coupled with near-record lows in U.S. Treasury yields, as an ill portent for the world economy.
A Bank of America Merrill Lynch survey of fund managers earlier this month found more bullishness on bonds than at any other time since the financial crisis. The survey also found participants holding more cash than they have on average over the past decade.
Some investors, concerned about trade uncertainty, are turning to U.S. stocks — the S&P 500’s dividend yield recently overshadowed the 10-year Treasury yield — in hopes that they would benefit from stable U.S. domestic growth and ultra-low interest rates around the world.
Other investors are taking their cues from the rally in gold, a haven asset whose lack of income-generating properties becomes less problematic when bond yields are low. And based on figures from Scotiabank and the Commodity Futures Trading Commission, there have been increased bets among hedge funds and other speculative investors on continued gains on gold as well as the yen.