I just read a shocking headline I had to share with you…
U.S. stocks haven’t been this unpopular since the financial crisis.
Honestly, I didn’t believe what I was reading. It simply couldn’t be true. Probably a misunderstanding between an editor and a financial reporter. Or maybe it was a trick – a bait-and-switch reference to an obscure indicator that has little connection to the crux of the story.
But then I read the article.
Here’s the part that hit me like a ton of bricks: Fund managers have a 20% net underweight allocation to U.S. equities, Business Insider notes, the lowest level since early 2008.
The data BI is referencing here comes from a Bank of America Merrill Lynch survey that includes 207 money managers with nearly $600 billion under management. These are widely considered the smartest guys in the room. And they’re running away from domestic stocks faster than they have in nearly 10 years.
The exodus from U.S. stocks isn’t a brand-new phenomenon, either. In fact, these same fund managers have been sneaking out of domestic stocks for months now (BAML says managers have remained 10% net underweight U.S. stocks for the past three months).
So we know big-money investors are moving out of domestic stocks. But we have to figure out their motivations for ourselves.
One of the most obvious reasons is that stocks are historically expensive right now. There simply aren’t a lot of deals on the market.
This makes sense considering all the bubble talk we’ve heard lately…
Everywhere you look, you’ll find articles and analysis telling you why we’re seeing mania in the stock market. Why stocks are too expensive. And why investors should consider locking in profits.
Sure, stocks are much higher this year. But is the recent price action a bubble? Does one exceptional year (so far) for equities somehow cancel out 18 months of chop and churn? What about the actual bear markets we just witnessed in small-caps, biotechs, and energy? Do these events not count because Netflix is trading for almost 250 times earnings?
I don’t think so.
The S&P 500 is up more than 10% year-to-date. The Nasdaq Composite is up more than 18%. U.S. markets are on a bull run.
But I don’t believe the big fund managers are ditching U.S. stocks because they believe they’re headed for a crash. I think they’re beginning to chase outperforming emerging markets instead…
As I told you earlier this month, emerging markets are starting to put American stocks to shame. The same stocks that couldn’t attract any attention since the financial crisis are decimating U.S. stocks so far this year.
The iShares MSCI Emerging Markets ETF (NYSE:EEM) has rocketed to gains of 25% year-to-date. This performance puts all the U.S. major indexes to shame – even the red-hot Nasdaq Composite.
Remember, U.S. money managers only have 5% of assets under management allocated to emerging market stocks, according to eVestment. Despite the incredible first-half performance of more than a handful of emerging markets, we have not yet seen a big rush into these stocks like we witnessed during the Goldman’s BRIC-mania earlier this century.
That’s going to change. And it’s going to happen faster than anyone thinks. Money managers aren’t crazy. They’re opportunists. They will gladly jump into emerging markets that are up 20%, 30% or even 40% — especially when they can justify their purchases because many of these markets remain “cheaper” than U.S. stocks.
The pros aren’t crazy. They’re getting ready to bank some serious gains while everyone else worries about U.S. stocks. Book it…