The Most Important Number of the Week Is 105.1
(Bloomberg Opinion) -- American exceptionalism is back! Or at least it is in the stock market. U.S. equities surged 16.7% in the first seven months of the year, trouncing the 5.90% gain in the rest of the world through late Friday as measured by the benchmark MSCI indexes. Not only that, but the U.S. outperformed by 4.06 percentage points this month, the most since April 2020.
Despite the heady performance, one critical ingredient had been missing: the backing of those with the most at stake. But that changed this month, when a State Street Global Markets index released Wednesday showed that institutional investors turned net bullish on the U.S. for the first time this year. The change in sentiment underscores how the outlook for the U.S. is only becoming stronger relative to the rest of the world, which is a testament to the policies put in place by the government and Federal Reserve to support the economy as the pandemic lingers. It also suggests that maybe the “dumb money” has been smart all along.
The State Street gauge, which is derived from actual trades rather than survey responses and covers 15% of the world’s tradeable assets, rose to 105.1 for July, the highest since April 2018, from 95.8 in June. (A reading of 100 means investors are neither increasing nor decreasing their long-term allocations to risky assets.) The index covering Europe was little changed at 92.8; the one for Asia fell to 87.
It is clear that the pandemic has led to what the International Monetary Fund described this week as a “two-track” recovery, with the outlook for one side strengthening and the other weakening. The organization raised its estimate for growth in advanced economies this year by 0.5 percentage point to 5.6% and cut its forecast for developing economies by 0.4 percentage point to 6.3 percent. At 7%, the U.S. stands above the average for both advanced and developing economies.
Sure, there are big concerns about the spread of the highly transmissible delta variant of Covid-19 and its potential to temper economic growth, but that’s not an issue specific to the U.S. Plus, there are few better places than the U.S. in which to stash money if growth does slow significantly given how the Fed and the government have shown a willingness to quickly inject liquidity and extend stimulus at the first sign of weakness.
The notion that the appeal of U.S. financial assets is increasing may be showing up in the dollar’s performance. It has strengthened 2.36% this year against a basket of nine other developed-economy currencies, trailing only the British pound, which has benefited from the conclusion of “Brexit,” and the Canadian dollar, which has received a boost from rising oil and energy prices.
The Institute of International Finance in Washington pointed out in a research note this week how dollar positioning has turned positive after an extended period of bearish tendencies. Indeed, total speculative bets on the dollar rising increased to 77,962 contracts in the latest week, Commodity Futures Trading Commission data show, the most since December 2019.
As you can tell from the chart, so-called net long bets were on the slide in 2019. Now, they are on the rise in a development that IIF Chief Economist Robin Brooks described as an “abrupt” swing that is “rare” and “likely to build.” Here’s what else he had to say about the big change in sentiment toward the dollar:
A year ago, markets were questioning the reserve currency status of the Dollar, a debate that reflected unprecedented budget deficits in the (U.S.) that were being substantially monetized by the Federal Reserve.
Of course, the U.S. is still facing trillion-dollar budget deficits, and the Fed is still buying $120 billion of Treasuries and mortgage-backed securities every month. But as the IMF’s forecasts show, all that has helped set the U.S. up for growth that will be stronger than just about anywhere else in the developed world this year and next.
Beyond that, it’s critical to realize that the world is becoming a much trickier place to invest. Just consider the shock decision by China, the world’s second-largest economy after the U.S., to ban profits at tutoring companies, resulting in losses to investors of some $1 trillion. The move reverberated throughout emerging markets, erasing the year-to-date gains in the MSCI EM Index of equities amid speculation that China is exerting more control over its markets and companies and may take similar action with other sectors.
Much has been made of the rising influence of the “dumb money” retail investors on stock prices this year. They poured $500 billion into U.S. exchange-traded funds in the first seven months of 2021, more than in any full calendar year on record, according to Bloomberg News. But they have been right, and now the “smart money” is following. That should tell you something positive about the relative attractiveness of U.S. assets.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Robert Burgess is the Executive Editor for Bloomberg Opinion. He is the former global Executive Editor in charge of financial markets for Bloomberg News. As managing editor, he led the company’s news coverage of credit markets during the global financial crisis.
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