Investors Are Pulling out of the U.S. for the First Time in Years
A massive global shift could be starting now... Investors are pulling out of the U.S. for the first time in years... Two more great calls from Sjug... Don't miss Steve's next big winner... Central banks are still binging on U.S. stocks... A new 23-year low for the VIX...
Are global stock markets set to outperform the U.S. again?
According to the latest data, the answer is a resounding yes...
As you may know, U.S. stocks have dramatically outperformed the rest of the world since the financial crisis. According to market-data firm FactSet, U.S. stocks – as tracked by the benchmark S&P 500 Index – have risen 166% since the start of 2009. Over the same time, European and emerging markets stocks returned 99% and 74%, respectively.
But suddenly, investors are no longer favoring the U.S... Money is now moving out of U.S. stocks – and into European and emerging markets stocks – at the fastest rate in years. As the Wall Street Journal reported this morning...
Global money managers' allocations to U.S. stocks slumped to a nine-year low in April, according to a survey from Bank of America Merrill Lynch. And U.S. equity funds saw an outflow of $22.2 billion during the seven weeks that ended May 3, the largest seven-week redemption in more than a year, according to EPFR Global.
Much of the money is going to Europe. Net inflows into European funds in the first three months of the year hit a five-year high for the first quarter, according to Thomson Reuters Lipper.
Emerging markets are also benefiting. Strong manufacturing, industrial production and trade data in the developing world helped attract the strongest three-month stretch of net inflows to emerging market funds since 2014, according to the Institute for International Finance.
What's behind this change?
The Journal cited two big reasons that should sound familiar to regular Digest readers. First, U.S. stocks have become expensive, on both an absolute and relative basis...
The cyclically adjusted price-to-earnings ratio, known as CAPE, is 22 times in the U.S., compared with 16.7 in Europe and 13.7 in emerging markets, according to Makena Capital Management.
Second, there are signs the European economy is finally recovering after nearly a decade of stagnation...
The 19 countries in the European Monetary Union grew by 0.5% in the first quarter, which equated to an annualized growth rate of 1.8%. By comparison, U.S. output grew at an annual rate of 0.7% in the first quarter.
Over the past five years, the U.S. economy outgrew the euro area by 1.4 percentage points a year on average, according to the International Monetary Fund. The IMF expects that gap to narrow to 0.6 percentage point in the next three years...
While European corporate margins are still hovering around recession lows at 5%, margins in the U.S. are already near records at 8.8%, according to [Michel Del Buono, chief strategist at Makena Capital Management.] That suggests "much less potential" for earnings to further grow in the U.S.
As we've discussed, this is one of the big reasons our colleague Steve Sjuggerud turned bullish on Europe back in January...
Steve noted that U.S. and European stocks have performed similarly over the long term... yet each has outperformed the other for short periods of time.
Since the financial crisis, U.S. stocks have outperformed Europe by the largest margin on record. Steve said it was only a matter of time before Europeans stocks closed this gap... And history suggested they could soar triple digits as they did. As Steve explained in the January issue of True Wealth Systems...
We're in uncharted territory today. The U.S.'s outperformance has never been anywhere near this large. But history's less extreme examples point to big gains ahead in European stocks...
2002 was the last time the U.S. outperformed by nearly 50 percentage points over eight years. What happened next? A massive multiyear bull market in European stocks... If you'd waited for the uptrend before buying, then you would have bought European stocks in mid-2003. By late 2007, you would have made 172% gains. U.S. stocks returned just 74% over the same period.
A similar opportunity appeared in late 1998... And European stocks jumped 64% in 18 months back then. Today's opportunity is more extreme than either of those cases.
Again, it's still early, but more and more data suggest Steve's prediction is already playing out... And True Wealth Systems subscribers are benefiting. As we noted yesterday, Steve's two favorite European stocks are up an average of 20% in a little more than four months so far.
Steve has been all over the move in emerging markets, too...
In fact, one month later – in the February issue of True Wealth Systems – he highlighted a similar situation setting up in emerging markets stocks. From the issue...
The MSCI Emerging Markets Index rose 8.6% last year... its first positive year since 2012. But it underperformed the S&P 500 – again – for the fourth straight year. The chart below shows how dramatically U.S. stocks have beaten emerging markets over the past seven years. Take a look...
The U.S. market has massively outperformed, as the chart shows. More than that, emerging market stocks have essentially done nothing since 2010... They're up just 12% over the past seven years.
The last time emerging markets underperformed the U.S. market for four straight years was 1995-1998. You can guess what happened next... The MSCI Emerging Markets Index soared 64% in 1999. It went on to outperform the U.S. market for 10 of the next 12 years. It entered a bull market that led to 400%-plus gains.
In short, buying emerging markets after years of underperformance has led to incredible returns in the past.
True Wealth Systems subscribers are up 6% in Steve's preferred emerging markets recommendation in a little more than three months.
Longtime readers likely aren't surprised by these calls...
Steve's long-term track record is simply incredible.
Whether it was recommending gold and gold stocks in the early 2000s... U.S. stocks in 2009... real estate in 2010... or biotech stocks in 2012... no other analyst anywhere has nailed so many huge investment trends.
Today, Steve is bullish on Europe and emerging markets. But he says there is another opportunity that is even better. He says it offers investors the chance to make up to five times their money over the next few years, without taking big risks.
Of course, regular readers know Steve is referring to China... In fact, he's so bullish on Chinese stocks today, he's urging all Stansberry Research readers to put at least a little money in this idea right away. Click here to see why.
Here in the U.S., a dangerous trend continues...
Regular readers know central banks have been quietly buying up massive amounts of the largest blue-chip stocks. As Porter explained in the April 21 Digest...
Stocks are now essentially more expensive than they've ever been before. And who is buying at these levels? Central banks.
Central banks began buying stocks because they virtually ran out of bonds to buy. Said another way, once they bought so many bonds that interest rates fell to zero, they simply couldn't buy anymore. To continue their free-money policies, they had to continue to expand their balance sheets...
The central banks' move into equities is even more dangerous than most people realize... You see, they've funneled their buying into indexes to minimize the costs. As a result, the majority of these tremendous inflows have been channeled into the 10 largest stocks that trade in the U.S.: Apple (AAPL), Alphabet (GOOGL), Microsoft (MSFT), Amazon (AMZN), Facebook (FB), Berkshire Hathaway (BRK-A), Exxon (XOM), Johnson & Johnson (JNJ), JPMorgan (JPM), and Alibaba (BABA).
These shares are up 21% over the past year, compared with 11% for the S&P 500 as a whole. So... the central banks aren't merely buying at the top... They're concentrating their investments and following an investment strategy that's completely mindless.
Perhaps the most jarring example of this trend is the Swiss National Bank ("SNB"). More from that Digest...
The Swiss central bank owns more shares of Facebook than Mark Zuckerberg, the company's founder. When the world's wealthiest, most conservative, and most risk-adverse investors open a Swiss bank account to hold the world's best currency – the Swiss franc – they're really buying U.S. stocks.
In 2016 alone, the Swiss central bank ownership of global equities grew by 41%. The Swiss central bank now owns almost $500 billion worth of equities in markets around the world. That makes it one of the 10 largest investors in the entire world – a tiny country of just over 8 million people.
Incredibly, this move has only accelerated this year...
According to its latest 13-F filing with the U.S. Securities and Exchange Commission published Friday, the SNB went on a virtual buying spree in the first quarter of 2017.
As you can see in the following graphic, it dramatically increased its positions in its 20 largest holdings. This includes increases of 20% or more in Amazon, Alphabet, Apple, Facebook, and Microsoft...
We'll ask it again: What could possibly go wrong?
For now, though, investors aren't concerned...
In fact, they're as complacent as they've been in nearly 25 years.
As you can see below, the stock market's "fear gauge" – the Volatility Index (VIX) – closed at just 9.77 on Monday, its lowest level since 1993...
New 52-week highs (as of 5/8/17): Apple (AAPL), Boeing (BA), Coach (COH), Ctrip.com (CTRP), 3D Systems (DDD), WisdomTree Japan Hedged Equity Fund (DXJ), WisdomTree Japan Hedged SmallCap Equity Fund (DXJS), iShares MSCI South Korea Capped Fund (EWY), Alphabet (GOOGL), PureFunds ISE Mobile Payments Fund (IPAY), JD.com (JD), Nuveen Preferred Securities Income Fund (JPS), KraneShares CSI China Internet Fund (KWEB), McDonald's (MCD), PowerShares S&P 500 BuyWrite Fund (PBP), ProShares Ultra Technology Fund (ROM), Shopify (SHOP), and Stanley Black & Decker (SWK).
A quiet day in the mailbag. What's on your mind? Let us know at feedback@stansberryresearch.com.
Regards,
Justin Brill
Baltimore, Maryland
May 9, 2017