Investors Are Pouring Into U.S. Stocks to Avoid Greater Turbulence Overseas

Sure, pile into American stocks! What could possibly go wrong?

Investors Are Pouring Into U.S. Stocks to Avoid Greater Turbulence Overseas

‘There’s scarier places to be than in the U.S.,’ says one investor who has been seeking safety in defensive sectors of the U.S. stock market

The S&P 500 has outpaced major indexes in Europe and Asia since hitting its low for the year in mid-June.

By Hardika Singh, WSJ

Updated Sept. 6, 2022 11:52 pm ET

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

Skyrocketing inflation, worries about a potential recession, Russia’s invasion of Ukraine, rising energy prices and new Covid-19 outbreaks have rattled everything from stocks to bonds to commodity prices this year.

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

Investors have added money to U.S. equity-focused stock and mutual funds for four of the past six weeks, according to Refinitiv Lipper data, while yanking money from international stock funds for 20 consecutive weeks. That’s the longest streak since a 22-week run of outflows that ended in October 2019.

Behind investors’ conviction in the U.S. market? Belief that even if there were a recession, the downturn isn’t likely to be deep or protracted. Consumer spending has remained resilient despite inflation pushing prices higher. And some of that pricing pressure already appears to have peaked. So far, the labor market also continues to look robust as well.

The S&P 500 has outpaced major stock indexes in Europe and Asia since hitting its low for the year in mid-June. The U.S. benchmark has risen 6.6% since June 16, while the pan-continental Stoxx Europe 600 has added 2.9%, Japan’s Nikkei 225 has advanced 4.5%. Germany’s DAX and the Shanghai Composite have slid 1.3% over the same period.

This week investors will parse data from the services sector 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 watch the European Central Bank monetary policy meeting where the bank is again expected to raise interest rates.

Investors appeared to take solace from Friday’s jobs report, at least initially. The U.S. economy added jobs at a solid, but slower, clip in August. The data, which were largely in line with expectations, appeared to hit a sweet spot: Too strong a report might have given the Fed more resolve to keep raising rates, while a weak one might have indicated the economy was closer to tipping into a recession.

The summer rally in U.S. stocks began to stall after the Fed signaled its intent on taming inflation by steeply raising interest rates, even if it leads to an economic slowdown. The S&P 500 has fallen for three consecutive weeks, bringing its losses for the year to date to 18%.

Meanwhile, the U.S. dollar, considered a haven asset for investors across the world, has surged to a 20-year high. That has dragged down other global currencies—including the Japanese yen, euro and British pound—to their weakest levels in decades. When the dollar gains, it makes stock returns more attractive when compared with local securities.

Jerry Braakman, president and chief investment officer of First American Trust in Santa Ana, Calif., said he is seeking safety in the U.S. Treasury bonds, cash and defensive stock sectors this year. He isn’t looking to add to his international equity exposure, such as in emerging markets, China, Japan and Europe in the near term, he added.

“There’s scarier places to be than in the U.S.,” he said.

Global fund managers appear to be making similar wagers, according to recent surveys from Bank of America Corp. A net 34% of respondents in August said they were underweight European Union equities, while a net 10% were overweight U.S. stocks. That’s a U-turn from January when a net 35% were overweight EU equities and a net 5% were overweight U.S. stocks.

Among the challenges in Europe: Supply shortages from the war in Ukraine have led to skyrocketing gas and electricity prices. Adding to those worries, Russia’s Gazprom PJSC said Friday that it would suspend the Nord Stream natural-gas pipeline to Germany, raising the stakes for European governments trying to avoid energy shortages. Analysts are warning of a potential energy crunch this winter on the continent, which could send inflation spiraling even higher.

Already, consumer prices in the U.K. rose 9.4% in June from a year earlier, the fastest increase for a Group of Seven economy since the global surge began at the start of last year.

To fight 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 that move this week.

China is facing struggles as well. The world’s second-largest economy has been grappling with the economic impact from Covid-19 outbreaks, a real-estate downturn, heightened regulation of technology companies and bad weather. That has hurt everything from manufacturing activity to Chinese tech stocks—shares of Tencent Holdings Ltd. and Alibaba Group Holding Ltd. are both down about 14% since mid-June.

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

Tencent shares are down about 11% since mid-June as China struggles with Covid-19’s economic impact and a range of other factors.

Despite those obstacles, some investors are still bullish on foreign equities, pointing to their cheaper valuations after years of outperformance by U.S. stocks. The Stoxx Europe 600, for example, recently traded at 11.61 times its projected earnings over the next 12 months, according to FactSet, compared with 16.70 for the S&P 500.

Dan Tolomay, chief investment officer of Trust Company of the South, said he would consider adding to exposure to international equities, if valuations in the U.S. keep climbing.

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

Write to Hardika Singh at hardika.singh@wsj.com