By Akane Otani
U.S. investors are betting on the strength of the domestic
economy offsetting ruptures in global trade and emerging markets,
as stocks moved to within a whisker of all-time highs
Wednesday.
The rally lifted the S&P 500 and Dow Jones Industrial
Average to within 0.2% and 0.8%, respectively, of their
records.
The gains reflect a market environment in which the negatives
for stocks are proving to be less frightful for investors and the
underpinnings of the nine-year-old bull market remain strong.
Although the continuing trade dispute between the U.S. and China
has rattled investors in recent months, the latest round of tariffs
was less severe than investors had feared. Emerging markets have
shown signs of stabilizing after sliding earlier in the month.
Next week's Federal Reserve meeting has stirred little
nervousness, largely because many investors view another potential
interest-rate increase as testament to the economy's vigor.
Reflecting this perspective, yields on the benchmark 10-year U.S.
Treasury note rose to 3.081% Wednesday, the highest since May.
Meanwhile, the unemployment rate is hovering at the lowest level
since 2000, wage growth is accelerating and corporate earnings look
set to extend a streak of double-digit gains in the third
quarter.
"Many people are thinking the U.S. economy is on such a roll,
that why would they need to go elsewhere?" said JJ Kinahan,
managing director and chief markets strategist at TD
Ameritrade.
The market's latest run at records has brought the S&P 500's
2018 gains to 8.8%, a remarkable divergence from major indexes in
Europe and Asia, many of which have fallen into negative territory
for the year. The Dow industrials rose 158.80 points, or 0.6%, to
26405.76 Wednesday, while the S&P 500 gained 0.1%.
Underneath the rally, though, are changes in investor behavior
and the stocks propelling it. New sectors have gained, and previous
top performers have languished.
In September, the biggest gainers in the S&P 500 include
companies focusing on telecommunications services and consumer
staples -- so-called safe sectors whose steady dividend payouts
have long made them investor favorites when markets are volatile or
declining. These shares typically lag behind major indexes during
rallies, in part because they are perceived to offer limited
potential gains.
But in September, telecom shares are up 1.7% and consumer
staples are up 1.4%, beating a 0.2% increase in the S&P
500.
Some companies, such as Hershey Co., have rallied after
increasing their dividend payouts. Others have jumped on
industry-specific news: Cigarette makers Philip Morris
International Inc. and Altria Group Inc. increased after the head
of the Food and Drug Administration said he was considering banning
flavored e-cigarettes from the U.S., while Corona brewer
Constellation Brands Inc. rose after saying it was investing money
in a Canadian marijuana grower.
Many of the shares that powered the Dow industrials, S&P 500
and Nasdaq Composite to highs earlier in 2018 have tumbled this
month. Apple Inc., Amazon.com Inc. and Alphabet Inc. each has
declined at least 4% in September, partly reversing double-digit
percentage gains for the year. Facebook Inc. has declined more than
7% this month, adding to its retreat in the second half of this
year.
"As August ended and we rolled into September, there's been a
natural inclination towards more defensive sectors," said Michael
Arone, managing director and chief investment strategist at State
Street Global Advisors. "We're continuing to see the struggle
between the China hawks [in the White House] and those who want to
put the trade dispute behind them."
Beyond the bond proxies, there are other signs of investors
taking out protection against a pullback.
Investors are holding about 5.1% of their portfolios in cash,
the highest share in 18 months, according to Bank of America
Merrill Lynch's monthly global fund-manager survey.
To many, the moves reflect nervousness as investors get deeper
into what has often been a rocky period for the stock market.
September has historically been the worst month of the year for the
S&P 500, according to investment research firm CFRA, which
studied market returns going back to 1945.
This year has been no exception. Technology stocks, the
best-performing sector in the S&P 500 for the year, broadly
retreated after Facebook and Twitter Inc. executives testified
before Congress earlier in the month. The tech sector is down 2% in
September, on pace for its worst month since March.
Yet some analysts are skeptical the rally in so-called safety
trades is sustainable.
The Fed is widely expected to raise short-term interest rates by
a quarter percentage point when it meets next week. That could put
fresh pressure on both U.S. government bonds and their stock-market
proxies, which typically lag behind market indexes in a rising-rate
environment.
After being up 1.5% for the month through Tuesday, the S&P
500 utilities sector slid Wednesday, erasing its September gains.
Treasurys also remain weaker for the year.
Another factor that could slow the bond-proxy rally: lackluster
earnings growth. The consumer-staples sector is expected to post
the slowest earnings growth of the S&P 500's 11 groups in the
third quarter, followed closely by the real-estate and utilities
sectors.
But for now, few analysts see the factors that have kept
investors on guard disappearing soon. The possibility of the trade
fight escalating will likely keep optimism reined in for now.
Just 32% of individual investors believe the stock market will
be higher in six months, according to data through Sept. 12 from
the American Association of Individual Investors. That is down 10
percentage points from the prior week and below the historical
average of 39%.
"The wild card is the tariffs and if they end up actually
changing the narrative and pushing the U.S. economy lower," said
Brent Schutte, chief investment strategist at Northwestern Mutual
Wealth Management Co.
Write to Akane Otani at akane.otani@wsj.com
(END) Dow Jones Newswires
September 19, 2018 19:39 ET (23:39 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.