Monday, February 10, 2020

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U.S. stocks have become a ‘safety trade’

There’re a lot of liquid assets swirling around the world, waiting to move as the market narrative shifts.

Traditionally, when things get scary out there, the typical “risk-off” trade is to dump stocks and rotate into safer assets like Treasury securities and cash.

But within big asset classes like stocks, you’ll find that some stocks are “riskier” than others. For example, developed market stocks are considered more stable than emerging market stocks. Large-cap stocks are considered more liquid than small-cap stocks.

And so when you think of stocks that way, “risk-off” may actually mean global equity investors are rotating into more stable stocks (like U.S. stocks) and larger cap stocks (like U.S. stocks). These characteristics define the S&P 500 (^GSPC).

Fundstrat’s Tom Lee thinks this dynamic may explain much of the sharp market rally we’ve seen in recent days despite the persistence of disconcerting headlines (e.g. coronavirus, U.S. political uncertainty).

“There is just not enough S&P 500 to go around,” Fundstrat’s Tom Lee said in a note to clients on Thursday. “The S&P 500 is about $25 trillion in market cap and there is $300 trillion of global household liquid assets.”

View photos Trillions of dollars are looking for somewhere to go. (Fundstrat) More

Lee also notes that U.S. stocks further benefit from being heavily exposed to the U.S. economy where the data continues to improve as the rest of the world stagnates.

“Thus, picture the panic as money leaves riskier regions and looks for the U.S.,” Lee said. “This causes the S&P 500 to spike.”

Lee’s thesis that U.S. equities have become a “safety trade” is confirmed by global asset fund flow data.

According to Jefferies’ Global Asset Fund Flows Tracker: “In the week 30 Jan-5 Feb, a resumption of strong buying of US equities (+US$14.0 billion, a 7-week high) dominated global equity fund inflows (+US$14.1 billion). However, [emerging market] equity outflows accelerated.“

By Sam Ro, managing editor. Follow him at @SamRo

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