Investors rush to hide assets during market turmoil

The Russian invasion and the ensuing surge in commodity prices have sent investors haggling and betting on gold and government bonds that will pay off if they keep rising.

The unrest has sparked a trading frenzy involving one of the largest exchange-traded funds tracking gold, while investors have also poured money into government bonds, prompting a flood of withdrawals from earlier in the year. The WSJ dollar index, which measures the greenback against a basket of 16 other currencies, on Friday closed at its highest level since June 2020. The dollar is seen as a haven because of its status as the world’s reserve currency.

Within the stock market, many investors are turning to the stocks of utilities and other defensive companies. Shares of utility companies within the S&P 500 are up 3.6% so far this month, while the broader index has fallen 3.9%, bringing its decline for the year to 12%.

Investors say they are facing one of the most uncertain economic outlooks of the past few decades, and there is little clarity about how the situation in Ukraine will be resolved. Some have become concerned about the prospect of prolonged inflation as well as low economic growth such as the stagflation era of the 1970s. Adding to the concern, the Federal Reserve is set to begin raising interest rates this week and will likely not provide support for the markets as it has in recent years.

Eddie Perkin, chief investment officer for equities at Eaton Vance, said he has recently reduced investments in financial stocks, worried that a potential economic downturn could erode profits at banks. Mr Perkin said he was still thinking about the long-term effects of the conflict in Europe.

“It seems a little early for me to buy the dip. I don’t see any conclusions on the situation in Ukraine anytime soon,” Mr. Perkin said.

In addition to monitoring the Fed meeting on Tuesday and Wednesday, investors will analyze earnings reports this week from home builder Lenar Corp, retailer Dollar General Corp and shipping company FedEx Corp for clues about the trajectory of the economy.

The rush for shelter comes as commodity prices have soared around the world, raising fears of inflation. Oil prices rose several times last week to trade above $130 a barrel, their highest level since 2008, while wheat and corn prices recorded some of their biggest moves in history.

These fears have weighed on stocks recently and created intense volatility in other markets as well. The Nasdaq Composite plunged into a bear market last week, down more than 20% from November’s record. The Dow Jones Industrial Average posted a correction, down at least 10% from its recent high for the first time since the start of the Covid-19 pandemic.

Hans Olsson, chief investment officer at Fiduciary Trust Co., said his firm sold stock last week and prepared for a hike in cash on the prospect that a mix of high oil prices and expected interest rates stifle economic growth.

“If this drives the economy into recession, we want cash, one, to buffer the portfolio, and two, to take advantage of better prices down the road,” he said.

He’s not alone: ​​Strategists at JPMorgan Chase estimated that as of last week, investors had ramped up liquidity positions to the highest level since March 2020.

Certainly, many investors believe that the US economy is in a strong position to withstand a surge in energy prices. The unemployment rate fell to 3.8% in February, nearing a 50-year low of 3.5% just before the Covid-19 pandemic, while consumer spending rose sharply at the start of the year.

Some investors have not taken a defensive position. For example, individual investors, United Airlines Holdings Inc., Delta Air Lines Inc. and are buying shares of travel companies, including Carnival Corp., while the stock market has fallen widely, according to data from Vendtrack. This suggests they expect travel demand to sustain despite higher fuel prices and any macroeconomic headwinds.

But if oil prices remain high, it could undermine consumer confidence and make households think twice about discretionary buying. Even before oil hit its recent highs, there were signs of caution increasing. For example, a University of Michigan consumer survey said in February the gauge of consumer sentiment fell to its lowest level in more than a decade. On Thursday, Goldman Sachs economists said they were expecting slower growth this year due to the Ukraine crisis and rising oil prices.

Within the stock market, sectors traditionally considered defensive have a better hold than the S&P 500 as a whole. The utilities group, second in performance in March after the energy segment, is seen on the defensive as customers prioritize gas and electricity bills while cutting other expenses. The same concept applies to the healthcare group, which is down a bit this month. Utility American Electric Power Co. is up 5.4% in March, while shares of hospital operator HCA Healthcare Inc. are up 6.7%.

Utilities stocks also have a chunky dividend yield, allowing investors to earn bond-like income. According to FactSet, the S&P 500’s dividend yield is 1.38%, compared to 3.02% for its utility sector. The yield on the benchmark 10-year US Treasury note is hovering around 2%.

Many traders have flocked to options for one of the largest exchange-traded funds tracking gold, which is sending activity at its highest level since February 2020, while bullish trades in particular have skyrocketed. Cboe Global Markets data show. Activity in calls, which give the right to buy shares at a specific price by a specified date, rose to an all-time high last week’s record high. Investors have also poured money into the iShares 20+ Year Treasury Bond ETF, giving the fund four consecutive weeks of inflows after significant outflows at the beginning of the year.

Investors had given up on some of these trades in recent months. Gold prices eased last year and began 2022 before rising in February and continuing their climb this month. Treasury yields had risen in recent months as investors positioned for the Fed to raise interest rates. Recently, they have registered some of their sharpest declines in the past two years.

The S&P 500’s utilities sector grew 14% last year, far less than the S&P 500, which grew 27%.

Asha Shah, senior portfolio manager at Summit Global Investments, said that in recent months her firm has bought shares of companies in the traditionally defensive consumer-staples sector, including Hormel Foods Corp., Walmart Inc. and Procter & Gamble Co.

“Staple spending is not going to slow down. You’re not going to use less or more toilet paper than you used two years ago because of interest rates,” Mr. Shah said.