Wall Street isn’t hopeful that President Donald Trump will reverse course on his increasingly tougher stance on trade with China.
And those power brokers are voicing that view by which stocks they are choosing to hold for clients.
The average large-cap mutual fund is Underweight on U.S. firms with the highest sales exposure to China and has been gradually cutting exposure to these stocks during the past 18 months, according to fresh data from Goldman Sachs. Being Underweight is another way of Wall Street saying it expects the U.S. trade war with China to overly hurt companies with outsized exposure to the country and likely, and its stock prices.
Meanwhile, hedge funds have also tilted more defensive with their portfolios. Goldman’s research shows hedge funds are Underweight information technology (trade exposed, too) and financials (also trade exposed — worsening trade conditions are causing the Fed to consider lower interest rates, which hurt bank profitability).
Tech overall is the largest net Underweight among hedge funds, Goldman says.
Hedge funds, similar to mutual funds, have plowed into the health care space despite headline risk ahead of the 2020 presidential election and elevated valuations.
“The newest fund positioning data reflect ongoing concern about US-China trade relations,” Goldman Sachs strategist David Kostin writes.
Goldman’s analysis covers 835 hedge funds with $2.1 trillion of gross equity positions and 597 mutual funds with $2.6 trillion in assets under management.
Wall Street on edge
There are indeed other indications Wall Street remains on edge as Trump uses Twitter diplomacy on global trade.
The S&P 500 has largely been range-bound since March despite a better than decent second quarter earnings season. Last Friday — a session where the Dow Jones Industrial Average (^DJI) plunged 623 points as China and the U.S. slapped each other with new tariffs — was the third time investors have seen a greater than 2% loss for the S&P 500 this month, points out SunTrust Chief Markets Strategist Keith Lerner.
As for the closely watched 10-year Treasury yield, it’s hovering around 1.5% versus 3.2% last fall. Many on Wall Street are bantering if the 10-year dips into negative territory just like 30% of the other globally traded bonds.
“From a market perspective, the news flow has been slanted to the negative side, and we have yet to see broad signs of global economic stability,” says Lerner, adding that the “corrective phase” for markets is still unfolding.