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It's America First in markets as S&P thrives in Trump trade haze

[NEW YORK] What had been a worldwide party in global markets has lately been a party of one.

With stress breaking out from Turkey to Russia, equities in China bouncing around to the tune of US$100 billion a day and talk of contagion everywhere, US shares are turning into the safest bet. The S&P 500 is up 6 per cent in 2018 and the rest of the world is down 5.8 per cent, the biggest split in four years.

Credit the impregnable US earnings fortress if you want, but it's hard to ignore the fingerprints of another American institution: the president, whose campaign over trade has torpedoed progress that last year sent emerging market stocks soaring the most in almost a decade. The fruits of a coordinated global economic recovery may still be out there, but right now it's mainly investors in the US who are enjoying them.

"The US market is believing that Trump is going to get his way with whatever he wants," Gary Bradshaw, a portfolio manager at Hodges Capital Management in Dallas, said by phone. "And I think they like that."

That's not to say US markets will cheer every economic move the Trump administration makes. Take Friday, when the S&P 500 slipped the most in four weeks after the president exacerbated the economic crisis in Turkey by strengthening steel tariffs.

The retreat erased what would've been the index's sixth straight weekly gain, leaving it lower by 0.3 per cent in the five days. Still, American equities fared better than their global counterparts.

European and emerging-market stocks bore the brunt of Friday's selloff, sending both regional benchmarks lower by at least 0.9 per cent for the week.

It's a turnabout from last year, when a synchronised economic recovery and improved earnings helped global stocks rally twice the pace of the S&P 500. Not now, as growth slows from China to Europe and Mr Trump presses his case for tariffs. That's made American investors arguably a beneficiary.

A strengthening US dollar has certainly boosted the allure of American assets. But the divergence in equity markets is more than a dollar story. Even in local currency terms, few countries have done better than the US, where the S&P 500 is within 1 per cent of an all-time high.

Among 92 benchmark indexes tracked by Bloomberg around the world, two-fifths are down at least 10 per cent from their recent peaks. Eleven of them, including the Shanghai Composite Index and Argentina's Merval Index, have fallen more than 20 per cent.

"Whenever we get one of these large divergences, the question becomes, is it an opportunity to buy the laggard, or a warning sign that the leader is vulnerable?" said Jonathan Krinsky, chief market technician at Bay Crest Partners LLC.

"While we don't think US stocks are going to see the magnitude of decline that emerging markets has, we think directionally some further pullback makes sense."

This doesn't mean that things won't change before the year-end, according to Paul Nolte, a portfolio manager at Kingsview Asset Management. The slowdown in growth from China to Europe will send ripple effects to the US markets as soon as next year, he said.

"The fact that the US economy and stocks are doing fine doesn't mean that they will continue to be shielded from global peers in the future," said Paul Nolte, a portfolio manager at Kingsview Asset Management in Chicago. "US stocks look better than their global peers, but they're also more expensive, and there is no guarantee that a rally will last."

As President Trump ratcheted up his trade fight with nations from China to Mexico and Europe, American investors have preferred to deploy money at home, at least going by flows to exchange-traded funds. Since the start of the year, they've added almost US$70 billion to funds that focus on US equities, twice the total flow to international stocks, data compiled by Bloomberg show. Last year, both attracted roughly the same amount of money.

"The US financial system is actually in pretty good shape," said Brad McMillan, chief investment officer for Commonwealth Financial Network. "We're not exposed to the risk that we were in the last sets of financial crises and even if we were, we're better positioned to ride them out. So from the US perspective, this could certainly be damaging, but it's not a systemic issue."