With the S&P 500 Index breaking out to record highs, at least one firm is advising its clients to reduce exposure to US stocks and seek bargains abroad.
Ned Davis Research downgraded its view on US equities to underweight — the equivalent of a sell rating. At the same time, the firm’s analysts raised their rating on Japanese stocks to overweight while beefing up bets on emerging markets, according to a report published on Oct. 23.
The US “is the most expensive regional index based on the metrics,” wrote Tim Hayes, the firm’s chief global strategist. Valuations for emerging markets are “far better” while Japan is benefiting from a cheaper yen, he added.
The firm’s call rests on an assortment of metrics, including technical signals like relative strength and price momentum, as well as exchange-traded fund asset levels. Their wary view contrasts with many peers, who’ve remained largely optimistic on US stocks despite stretched valuations and looming trade war risks, thanks to strong earnings and expectations that the Federal Reserve will continue easing monetary policy in coming months.
Cooler-than-expected inflation data on Friday cemented forecasts for the central bank to reduce borrowing costs by a quarter of a percentage point next week, taking the S&P 500 to a new record.
But that momentum shows signs of fading, according to Ned Davis. The firm points out that US stocks have underperformed the iShares MSCI ACWI ETF (ACWI) — an index of large- and mid-capitalization developed and emerging market equities over the last three weeks, as well as for the year. That measure is up 20% year-to-date, compared to a 15% gain for the MSCI US Index. The MSCI Emerging Markets Index is up 28% this year, the biggest gain among regional benchmarks tracked by the firm.
As US relative performance has languished, asset levels in ETFs focused on the country’s equities have trended lower, the firm said.
There have been other signs of caution in markets, as President Donald Trump’s trade negotiations with China veer of course and the government shutdown — now the second longest in history — shows little signs of being resolved.
Money-market funds attracted $23.6 billion for the week ended Oct. 22, comprising the bulk of weekly inflows, while gold funds had their largest weekly inflow on record, according to Bank of America Corp., citing EPFR Global data. BofA chief investment strategist Michael Hartnett urged clients to use the metal as a hedge.
Valuations are another cause for concern: The S&P 500 trades at 23 times future earnings, compared to a 10-year average of 19 times.
Meanwhile, Morgan Stanley’s Michael Wilson said earlier this week that investors should remain cautious in the near term as unresolved risks around trade tensions and slowing earnings revisions threaten stocks.
Written by: Alexandra Semenova @Bloomberg
The post “Ned Davis Research Grows Wary on US Stocks Versus Rest of World” first appeared on Bloomberg
