The threat of a global trade war is starting to show up in investor portfolios.
Investors poured cash into exchange-traded funds that track producers of consumer staples and energy last month, and ditched holdings in industrial and financial companies, according to data compiled by Bloomberg using flows for State Street Global Advisors' suite of SPDR sector funds.
While the S&P 500 Index notched a gain for the month thanks to a bedrock of earnings expectations, escalating tensions over trade sparked movement beneath the surface. Industrial companies that stand to lose most from high tariffs took a beating, while banks notched a record losing streak after Treasury yields tumbled on bond demand. That made steady earners such as producers of soap and paper towels more attractive.
"Trade tensions sent Treasury yields from 3.11% in mid-May to 2.86% currently, and have driven a rotation into more defensive stocks and sectors," Jonathan Golub, Credit Suisse's chief U.S. equity strategist, wrote in a note to clients Monday.
The
consumer staples fund (XLP) saw about $583 million of inflows in June alone, a complete reversal for the first five months of the year when the fund bled the most cash in the suite, losing over $773 million, the data show. The
energy ETF (XLE) got a boost from a surge in oil prices that took West Texas Intermediate to the highest since 2014.
The rotation shows investors haven't given up on equities, with equity bulls pointing to estimates showing analysts see S&P 500 profits rising 24% in 2018, then 10% in each of the next two years. But after a torrid start to the year, stocks have been stuck in a rut, with the Federal Reserve picking up the pace of tightening at the same time President Donald J. Trump roils the global trading order. That's made investors search for better deals among stocks.
Valuations for the staples sector are "a lot more reasonable" right now thanks to higher interest rates, acting as a kind of proxy for investors that like big dividends, Paul Nolte, a portfolio manager at Kingsview Asset Management, said in an interview last week.
"We're looking for the staples to start to pick up again, and for the equity market to signal to us they're starting to be a little bit more concerned about an impending recession that is still from our view a little ways down the road," Mr. Nolte said.
Inflationary Pressures
Investors may be piling into energy bets as restrictive global commerce could slow growth around the world and also add to inflationary pressures. That, in turn, may boost commodity prices, according to Jim Paulsen, chief investment strategist at Leuthold Group. With the Fed looking to raise interest rates and its preferred price gauge at the 2% target, investors are eyeing inflation levels.
The Energy Select Sector SPDR Fund (XLE) took in about $420 million in June, after investors pulled about $44 million from the strategy this year through the end of May.
And if the moves into consumer staples and energy aren't convincing enough of a defensive rotation, there are also record inflows into the largest ETF tracking U.S. Treasuries. In June, buyers added record inflows into a $6.5 billion ETF tracking U.S. Treasuries.
(More: Advisers take a short-term view of trade skirmishes)
