Statistics from the Treasury Department on foreign buying and selling of US securities presently extend only through May 2013. Yet reduced net foreign acquisition (official and private sources combined) of UST notes and bonds confirms the trend of higher UST rates over the past year (use the 10 year note as a benchmark). Moreover, as overseas UST holders actually have been net UST sellers on average over the first five months of calendar 2013, this warns of higher UST yields on the horizon. Although UST yield trends depend on numerous factors, including federal fiscal trends, the Federal Reserve hints that it will reduce its gigantic UST buying (money printing) in the relatively near future. And doesn’t the Fed’s two percent long term inflation target and its higher Federal Funds rate forecast for the long run portend higher rates?
The United States has enjoyed a fairly robust economic recovery since around the time of the major low in the S+P 500 around 667 on 3/6/09. Yet despite this, foreign direct investment in America not only has not matched the highs of 2000 and 2008, it shows signs of ebbing, particularly in first quarter 2013 (the most recent data point).
This recent dive in net foreign direct investment is roughly consistent with the slide in net foreign buying of UST notes and bonds and American corporate debt. Looking forward, this combination suggests that higher US interest rates and a weaker US dollar are on the horizon. Does net foreign direct investment data offer warning flags for equity voyages? Recall that highs and subsequent declines in foreign direct investment roughly paralleled pinnacles and falls in the US stock marketplace in first quarter 2000 and October 2007/May 2008. Suppose American interest rates keep climbing, or that the US dollar drops significantly (or both) and that US corporate earnings do not grow much if at all.
Anyway, a survey of net foreign buying that includes not only long term debt but also stocks shows a significant slide over the first five months of calendar 2013 relative to the past several years. Five months obviously is a fairly brief period. Yet this slowing net acquisition, when interpreted alongside the decline in foreign net direct investment, hints that America “in general” is becoming relatively less desirable to foreigners from the economic standpoint than it used to be. Admittedly this conclusion is contrary to much rhetoric flowing through marketplaces and media.
These rather recent US securities and direct investment patterns, because they float alongside the long run bear trend (relatively weak) for the broad real trade-weighted dollar as well as the continued probability of US current account deficits, signal that the trade-weighted dollar generally will remain feeble and probably will decline.
So in the current and future marketplace context, arguably the significant FDI slump since calendar 2011 (assuming no big jump in FDI from the calendar 2012/1Q13 levels) may be a leading indicator of a decline in the S+P 500. In any case, the slowdown in FDI since 2011- and particularly 1Q13’s depressed amount (assuming such a mediocre quantity persists)- hints that in a rising US interest rate environment that it will become increasingly difficult for US stocks to make new highs unless further big (net) new waves of US cash venture into those equities.
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