S&P 500 manages weekly gain for restless bulls

Bloomberg

The bulls are back in charge
after a second weekly advance pushed the S&P 500 Index to a fresh record. But look a little more closely and the signs of unease in the stock market are hard to ignore.
It’s visible in fund flows, where investors are rotating from US stocks to the rest of the world at the fastest pace in two years. And short sellers are getting aggressive, raising bearish bets in three of the past four months.
US stocks climbed this week, led by by phone companies and materials producers. The S&P 500 increased 1 percent to 2,438.91 and Dow Jones Industrial Average added 0.6 percent to 21,204.58. While the gains built on the previous week’s breakout, neither index is more than 2 percent above the all-time highs reached on March 1.
In other words, benchmark indexes are at records, but they also haven’t advanced much since March, one of the longer periods of stasis since Donald Trump’s election. For all their resilience, equity investors remain anxious about an economy that has recently given uneven evidence of its vigor just as the Federal Reserve prepares to raise interest rates. After employment report, three-month US jobs growth is now the lowest since 2012. Housing demand weakened more than expected in April, and while manufacturing gauges remain firm, a series of reports on inflation continue to show corporate pricing power is muted.
“It is a warning that, as with asset prices, the key question is not the level you are at, but the prospects for growth from here,” said David Kelly, chief global strategist at JPMorgan Funds
in New York. “Investors sho-
uld consider whether overseas economies with greater growth potential may provide better equity market returns.”
Meanwhile, investors in exchange-traded funds turned net sellers of US stocks in May for the first time in a year, with withdrawals approaching $2 billion, data compiled by Bloomberg show. They added $22 billion to equity funds that invest in markets from Europe to Asia.
The divergence in flows, the widest since April 2015, marked a turnaround from last year, when almost $10 went for American
equities for every one that went elsewhere.
Even as stocks vaulted to new highs, bears aren’t deterred. Short interest as a proportion of total shares outstanding has expanded since January, rising by 0.3 percentage point to 3.9 percent. Never before has an equity advance as big as this year’s occurred simultaneously with more short sales, according to exchange data compiled by Bloomberg that goes back to 2008.
Spotty demand for American stocks coincided with hiccups
in economic data. Rather than picking up pace as expected by many at the start of the year, Citigroup’s Economic Surprise Index for the US, which measures the difference between actual releases and economist expectations, peaked in March and has since fallen to the lowest level since February 2016.
By contrast, similar gauges for the rest of the world have fared better as Brazil and Russia emerged from recessions while the populist political tide receded in Europe. Since the global financial crisis, the US had dominated equity gains worldwide, with rallies underpinned by easier monetary policy and a steady recovery.
Now that growth is poised to accelerate from Europe to Japan, American assets are losing some of their appeal. In Bank of America Corp.’s latest survey of money managers, 82 percent called the US the most expensive market.
While the S&P 500 is up 8.9 percent this year, it’s poised to trail the MSCI World ex-US Index for the first time since 2009. The dollar is heading for the worst annual decline in a decade after losing about 6 percent of its value against a basket of currencies.