Investors Abroad Are Cooling on the U.S., Signalling Slowing In Haven Flows

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Global investors may not be snapping up U.S. assets as quickly as they did in 2020. But don’t fret, this could be a sign that growth is headed in the right direction. 

In 2020, haven flows from around the world targeted two assets: the dollar and big tech stocks (and by extension, the S&P 500). Eventually it became expensive to enter a position in U.S. stocks thanks to the greenback’s strength, which spurred further buying of American assets when the dollar weakened. The dynamic pushed the inverse correlation between the two to the most significant since 2012, during the European sovereign debt crisis. 

But that relationship has been reversing over the past six months, perhaps indicating relatively less foreign appetite for large-cap U.S. stocks, including big tech. It’s not the first time we’ve seen this. The same thing happened during the trade war between U.S. and China throughout 2018 and 2019. It lasted until the first phase of the trade agreement was completed in the fourth quarter of 2019, which sparked a cross-asset risk rally. 

In some ways, the fading inverse correlation is a healthy sign. The dollar and stock market rising together tends to signal a stronger underlying economy. The best example was in 2016 and 2017, when synchronized global growth pushed both higher, ultimately resulting in a positive 66-day correlation. It means investors were seeking U.S. assets based on strong American fundamentals. 

In 2021, although the U.S. economy was restarting after the original Covid-driven lockdown, and therefore growing, the rest of the world wasn’t necessarily growing at the same pace. That made haven bids, not fundamentals, the bigger driver of flows. But in 2022, as the fading correlation indicates, flows into the U.S dollar, tech stocks and broader American assets are likely to be more driven by fundamental reasons like Federal Reserve moves, valuations, sales growth and consumer spending.