Can waves of global market upheaval actually BENEFIT U.S. stocks? Believe it or not, the answer is “yes.”
I know it sounds crazy. But it all goes back to the premise that things are even worse overseas. In this world gone mad, the U.S. is the safest “safe haven” around.
We’re a vast vacuum cleaner sucking up global capital looking for a home, whether it’s in stocks, bonds, real estate, or other assets.
You’ve heard me make a similar argument – one based on the concept of “following the money” – for a year now. Back in December 2016, I wrote:
“Follow the money. That’s what the tipster code-named ‘Deep Throat’ told Bob Woodward and Carl Bernstein when they were reporting on the Watergate scandal. But that advice applies in investing, too. If you can figure out where big-money investors are directing their capital, and invest alongside of them, you can generate significant profits for yourself.”
My analysis at the time: Be bullish, focusing on financials, materials, IT, and consumer discretionary stocks. Then in February of this year, I confronted the market’s doubters, saying “One thing tells me this stock market rally will ultimately have LONG legs: Fund flows!” and “The multi-month and multi-year trends in fund flows tell me this rally has legs … potentially very long ones.”
Again, it all goes back to the simple principle of following the money. Investors here in the U.S. have been hiding out in bonds for way too long, shunning stocks that offer higher returns and less inflation risk.
Investors overseas are looking for places their money will be treated better than in debt-plagued Japan, politically unstable Europe, and elsewhere. That’s leading to a powerful one-two combination of massive stock market inflows.
Case in point: Net Equity ETF and mutual fund inflows totaled $143.2 billion in the first seven months of 2017, according to the Investment Company Institute. That was a huge swing from outflows totaling $67.7 billion in the same period of 2016, as you can see in this chart:
So, my advice is simple: Stay long, but stay nimble. The autopilot-style market we’ve been seeing throughout 2017 is likely to give way to more volatility soon. But the influx of capital from overseas investors that we’re seeing should drive U.S. stocks generally higher into year-end and beyond.
Until next time,