Resilient U.S. Growth Propels Stocks as Trade Fears Ease

Investors are piling back into stocks and unwinding massive bets on haven assets, illustrating renewed faith that a resilient U.S. consumer can continue powering economic growth.

Billions of dollars have flowed into funds that track stocks in recent days, and measures of investor sentiment show increased optimism. Last week’s rally, which pushed major U.S. stock indexes to the cusp of records, was led by shares of banks and small companies tied to the domestic economy. Those sectors have lagged behind in recent months but are staging one of their fastest rallies in years. At the same time, Treasurys and gold, popular destinations for skittish investors, have taken a U-turn as fears have eased about a looming recession. Driving the reversal: hopes for coming trade talks with China and a spate of better-than-feared economic data. Figures from the past few weeks have shown steady retail sales and activity in the services sector, contained but stable inflation, and strength in the labor market. Although there are signs a manufacturing downturn overseas is spreading to the U.S., data tied to the consumer generally remain healthy. And because consumer spending accounts for more than two-thirds of economic output, some investors are hopeful more upbeat figures will drive stocks to new peaks—the S&P 500 is up 20% for the year and within 0.6% of July’s all-time high.

“Everything looks very attractive in the U.S.,” said

Omar Aguilar,

chief investment officer for equities and multiasset strategies at Charles Schwab Investment Management, which is favoring U.S. stocks over international shares. “Consumer spending continues to be very strong, so people are starting to get less worried.” The sudden market shift occurred after the U.S. and China softened rhetoric on trade and agreed to talks in Washington next month, highlighting how the trade war continues to hold markets hostage. A presidential tweet that takes a harsher tone could easily bring about another reversal. For now, though, investors feel a thaw in the geopolitical air. About $14.4 billion flowed into global stock mutual and exchange-traded funds during the week that ended Wednesday, the largest such inflow since March 2018, according to a Bank of America Merrill Lynch analysis of data from fund tracker EPFR Global. The yield on the benchmark 10-year U.S. Treasury note, which is tied to everything from student debt to mortgages, staged its largest weekly climb since June 2013—just days after approaching a record low. Yields, which rise as bond prices fall, had tumbled this summer as many investors flocked to safer investments. Gold prices, meanwhile, have dropped nearly 4% since hitting a six-year peak earlier in the month.

The pullback came as the S&P 500 rose for the third consecutive week, boosted by battered banks, manufacturers and commodity producers. For the week,

Bank of America
Corp.

surged 8.8% and

Caterpillar
Inc.

added 9%. And small companies that earn more of their revenue domestically outpaced major indexes by the largest margin since November 2016. “That reinforces the point that perhaps things aren’t as bad as people feared,” said Amanda Agati, chief investment strategist at PNC Financial Services Group. “We think the market can forge ahead from here.” Ms. Agati said she was inundated with calls from nervous clients after the recent inversion of the yield curve, a measure of the gap between short- and long-term Treasury yields, but tried to keep them focused on areas of strength in the economy. Short-term yields have eclipsed longer-term ones before past recessions, though the time between such inversions and economic growth halting has varied. “It’s a challenging backdrop,” Ms. Agati said. “It’s tricky because you don’t want to get too defensive too soon.”

Further bolstering hopes for an improved growth outlook: The Citigroup Economic Surprise Index for the U.S. recently turned positive for the first time since February, indicating data are generally coming in better than expected after downward revisions to growth targets in recent months. A similar measure for emerging markets has also rebounded. That gauge remains in negative territory, indicating figures are still broadly missing targets. To some analysts, the perceived gap between domestic growth and economic activity globally is affirming the effect known as TINA: “There is No Alternative” to U.S. stocks. Major indexes have long outpaced global equities and commodities, and a monthslong decline in bond yields has made dividends paid to shareholders look more appealing.

SHARE YOUR THOUGHTS Do you think growth in the U.S. will continue to outpace the rest of the world? Why or why not? Join the conversation below.

Investors this week will be monitoring the Federal Reserve’s latest interest-rate decision and commentary amid hopes that lower borrowing costs will also support the economy. The central bank is expected to cut rates for the second time in three months, but some analysts say still steady growth calls into question bets on even more cuts ahead. “The risk of recession is still relatively tame,” said

Steve Chiavarone,

a portfolio manager at Federated Investors. “If earnings can stay anywhere near where they are, we think that’s enough for the market to move higher.” Mr. Chiavarone is still overweight stocks, meaning he holds a larger position than the benchmark the firm tracks, and said he prefers shares of fast-growing companies in sectors like software and high dividend payers to stocks that are more economically sensitive. The prospect of a sustained drop in corporate profits is one reason some investors are skeptical that stocks can continue climbing, particularly with more tariffs possibly on the horizon. The U.S. has proposed duties on a host of Chinese imports including smartphones and toys to take effect in December, potentially complicating plans for business spending and earnings projections.

FedEx
Corp.

,

General Mills
Inc.

and

Adobe
Inc.

are among the notable companies reporting earnings this week. “We need to get some guidance from some of these companies, particularly these larger companies that are very multinational,” said Megan Horneman, director of portfolio strategy at Verdence Capital Advisors, which is holding elevated levels of cash and favoring value stocks that it considers cheaper. “We don’t expect that volatility is over.” Write to Amrith Ramkumar at amrith.ramkumar@wsj.com

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