Bulls Charge Back: Investors Brush Off Trade War Fears

The market is roaring back to life, with investors pouring record amounts of money into stocks and gold, seemingly unfazed by the looming threat of trade tariffs. Bank of America's chief investment strategist, Michael Hartnett, recently shared a note highlighting the massive inflows into U.S. stocks, which saw a net capital inflow of $34.1 billion last week. This surge in investment suggests that many market participants are not convinced that the trade war will lead to an economic recession or a bear market on Wall Street.



Hartnett playfully dubbed April 2, the day "reciprocal tariffs" take effect, as a potential "peak fear" moment. However, he suggested that the market's direction might hinge more on who President Trump is playing golf with on April 1. This light-hearted remark underscores the unpredictable nature of the current market environment, where geopolitical events and political decisions can have a significant impact on investor sentiment.

Despite the potential for short-term turbulence, bonds and gold appear to be far less exposed to a potential "tariff pandemic" than U.S. and international equities. According to Hartnett, short-term trade-related turbulence can still make gold and bonds safer plays for now. The SPDR Gold Trust GLD has posted gains in eleven of the past twelve weeks, indicating that investors are seeking safe-haven assets amidst the uncertainty.

The resurgence in European equities comes amid collapsing sentiment elsewhere. Hartnett flagged the second-biggest drop in global growth expectations ever and the biggest decline in U.S. equity allocation on record. This shift in sentiment suggests that investors are becoming more cautious and are looking for opportunities outside the U.S. market.

The recent equity inflows reflect a mixed investor sentiment towards the potential economic impacts of the trade war. On one hand, there has been a significant outflow from U.S. equity funds, particularly in the tech sector, due to escalating trade war fears. For instance, "U.S. equity funds witnessed the largest weekly outflow in four weeks in the week to March 5, driven by a tech sector selloff and escalating trade war fears after President Donald Trump imposed steep tariffs on imports from Canada, Mexico, and China." This outflow amounted to a net $9.54 billion, indicating a subdued risk appetite and concern over the economic implications of the trade war.

On the other hand, there have been notable inflows into certain sectors and regions, suggesting that some investors remain optimistic about the long-term resilience of the economy. For example, "large-cap funds attracted net inflows of $2.93 billion," and "U.S. debt securities for a ninth consecutive week, as they snapped up a net $5.4 billion worth of bond funds." Additionally, "money market funds were in demand for the second successive week, with a net $46.77 billion in purchases during the week." These inflows into safer assets like bonds and money market funds indicate a cautious approach, but also a belief that the economy will weather the storm.

Furthermore, the inflows into global equity funds, despite the trade war, show that investors are still willing to take on risk in certain areas. For instance, "U.S. and Asian equity funds received modest net inflows," and "European equity funds faced the heaviest selling during the week, as the EU's retaliatory tariffs on U.S. goods heightened trade tensions, leading to investors withdrawing a net $5.29 billion." This suggests that while there is concern about the trade war, there is also confidence in the long-term resilience of certain economies and sectors.

In summary, the recent equity inflows reflect a cautious but not entirely pessimistic investor sentiment towards the potential economic impacts of the trade war. While there is concern about the short-term effects, particularly in sectors like technology, there is also confidence in the long-term resilience of the economy, as evidenced by inflows into large-cap funds, bonds, and certain global equity funds.