Featured in Bloomberg Opinion: Remaking the world through exiting US stocks

Things Fall Apart

This is a disconnecting world. Events of the last 24 hours have made ever clearer a trend that has been taking shape for years: Germany has decided to go ahead with massive borrowing to fund rearmament, and the DAX surged while US stocks fell; China’s BYD Co. announced a new battery for its electric vehicles that prompted a big US selloff for Tesla Inc.; and Bank of America’s latest survey of fund managers found the biggest switch away from US stocks on record. 

All of these are consistent with a move away from US exceptionalism, the popular name for the dominance of the dollar and the Magnificent Seven group of tech platforms that has been a feature of the last decade. But it goes further. Rather than the globalized free markets that have held sway since the end of the Cold War, the world is reallocating itself into independent groups or spheres of interest. This is a new form of mercantilism, or autarky — the economic term for national self-sufficiency. If the US has turned away from globalization, some autarkic direction is inevitable. But there’s still huge uncertainty over how the new economic power blocs will be configured.

The turn in markets has been startlingly sudden. This chart shows the Magnificent Seven’s performance compared to the DAX since the start of last year. Anyone who shorted the Mag 7 and put the proceeds into the German benchmark before the Christmas break is now sitting on a 56% profit:

The BofA survey shows the biggest switch on record by fund managers out of the US over the last four weeks. As with market prices themselves, the turn, when it came, was sudden and dramatic:

Viewing the same information in a different way, this is how fund managers shifted their allocations just in the past month. The exodus into Europe and emerging markets (but not to Japan to the same extent) is extraordinary:

Earlier this month, the quarterly survey of asset allocators conducted by Absolute Strategy Research, which asks them to put a probability on market moves, foreshadowed this with a dramatic drop in those expecting the US to outperform everyone else:

Some of this is merely the unwinding of a market trend that was already overdone before its final dose of euphoria by Donald Trump’s election victory. The US was priced for something close to perfection, which set it up to start lagging other markets at some point. The price/earnings ratio of the S&P 500 had parted company with the rest of the world, and some narrowing of the gap was inevitable:

Other metrics suggest that the S&P is wildly overvalued. It trades at a higher multiple of sales than at the top of the dot-com bubble in 2000. As Points of Return noted, there is no telling whether that multiple is justified, but it’s hard to say that the overvaluation has been corrected:

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