‘America First’ Is Back as U.S. Stocks Near Record Versus Globe

(Bloomberg) -- If a trade war is about to kick into a higher gear, equity investors are ready to seek shelter in the best house in a bad neighborhood: the U.S.

As the S&P 500 Index slumped less than 0.5 percent Monday, global equities fared much worse, with one measure posting the biggest loss in six weeks. That briefly pushed the U.S. gauge to an all-time high relative to foreign peers, cracking above the previous closing peak reached in October.

‘America First’ Is Back as U.S. Stocks Near Record Versus Globe

While internationally-oriented U.S. stocks took it on the chin Monday following President Donald Trump’s threat that China would face higher tariff rates if a deal wasn’t reached before the end of the week, U.S.-centric equities actually posted gains. The Russell 2000 Index of small-cap American companies erased losses of more than 1 percent on the day. The Russell 2000 outperformed China’s Shanghai Composite Index by the most since February 2016.

‘America First’ Is Back as U.S. Stocks Near Record Versus Globe

U.S. “markets have been exerting restraint in not overreacting -- the ‘we have seen this movie before’ appears to be a market narrative, with both the price action and the dispersion across risk assets not catching up with the drama in China,’’ wrote Michael Purves, the chief global strategist at Weeden & Co.

This return of the divergence trade is a replay of what transpired in 2018. Following the imposition of steel and aluminum tariffs that March, the small-cap gauge posted massively superior returns versus global equities and was viewed as a haven of sorts, with subdued implied volatility relative to the Cboe Volatility Index and its historical norm.

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