Non-US investors don't like the US dollar, but they love US stocks. Today's data, discussed here, show that they bought a record $41.9bn of them in May, taking average buying in the last three months to $26bn, also a record.
My chart shows why this might matter. Foreign buying of US equities can be a lead indicator of annual returns on UK (and world) equities. Heavy buying in 2000 led to falling prices, whilst weak buying or selling in the mid-90s, late 1998 and 2003-04 led to good returns.
There might be a simple reason for this. Investors only really buy overseas stocks - even US ones - if they have a high appetite for risk. Even efficient market theorists agree that a high appetite for risk leads to low returns. And it can lead to negative ones if investors over-react.
This doesn't mean one should rush out to sell. Doing things is a sure way to lose money. And even leaving aside all the doubts one can have with about this relationship, there's another lead indicator - the dollar itself - that points to good returns.
It's just a little warning.
Chris - forget the $$, we should all be more worried about the collapse in confidence in the credit markets over the past three weeks.
The Xover index (a complex measure of the riskiness of corporate credit) has collapsed from libor+180 to 320 in just 3 weeks. This is a monumental move and cannot be good for stocks.
Posted by: pommygranate | July 19, 2007 at 07:46 AM