Just when you thought everyone had given up on the U.S. as a viable economic superpower for the 21st century and beyond, signs of interest in domestic stocks have started to reappear. No matter whether it's a one-time data blip or the beginning of a lasting trend, the changing behavior of investors will likely have a big impact on financial companies and on the value of your investment portfolio.
Green shoots for America?
It's been a while since you've heard spring metaphors applied to the U.S. economy. But if you're talking about where investors are putting their money to work right now, the green-shoots analogy might well be appropriate.
During the past few years, many investors have been reluctant to invest their money in risky assets. ETFs and mutual funds that invest in bonds attracted huge amounts of money, while stock funds tended to suffer. And within the stock-fund category, the greatest interest among investors went to international stocks, which sometimes even drew net buying at the expense of domestic stock funds.
But in November, both of those trends were absent within the ETF realm. According to figures released in Barron's, ETFs that invest in domestic stocks saw inflows rise from $3.1 billion in October to $5.9 billion in November, while similar global ETF inflows fell from $8.3 billion last month to $3.6 billion. Moreover, ETFs investing in U.S. fixed-income securities saw money flow out -- $571 million, versus inflows of $1.6 billion in the previous month.
The long-awaited reversal
Of course, there's nothing truly unexpected about any of this. What's more surprising is how long it took for the bond market to change course -- and even now, there's no guarantee that the exodus from bonds will continue.
But if people continue to chase performance, then it's a reasonable bet that bond investors will start running scared soon. Already, long-term Treasury ETF iShares Barclays 20+ Treasury Bond
Meanwhile, on the stock side, the popularity of international stocks and investor scorn for U.S. equities has had a dramatic impact on relative valuations. Earnings multiples on emerging-market stocks have risen to match U.S. stocks, whereas they've traditionally traded at a sizable discount. That's evident on individual stocks, too, where Ctrip.com
Moreover, risk abroad has come back into the limelight. Europe's woes have reminded U.S. investors that things aren't just bad here at home. In fact, if problems elsewhere in the world keep arising, then the U.S. may actually benefit from the relative prosperity here, even if the recovery isn't as strong as many would hope.
Oddly, traditional mutual funds aren't behaving the same way as ETFs. With mutual funds, investors still favor international stocks, according to the Investment Company Institute. So, ETF investors may be leading the change in trend.
How to invest
Over the long term, these sorts of moves tend to happen in cycles. Groups of stocks move in and out of favor, creating opportunities for those who are willing to invest against the prevailing trends.
If you have the stomach to be a contrarian investor, then being the first to embrace U.S. stocks again could be lucrative. But if you'd rather just have a strong investment strategy, simply build certain allocations to all different kinds of investments into your portfolio and stick with them through thick and thin. In the end, you should finish in just about the same place.
Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance.