Foreign investors keep plowing money into U.S. stocks

Almost exactly 5 years ago, we saw what appeared to be outright hatred of U.S. stocks by foreign investors. During the spring and summer of 2015, foreign investors were consistent, and heavy, sellers of U.S. equities.

Times have changed.

In July, there was a huge inflow from foreign investors. That was the peak month for flows, with nearly $80 billion coming in. While that has come down, flows have still been positive. It's been consistent enough that the 12-month sum of net flows is now just under $200 billion, challenging the highest in more than 40 years. The only months that exceeded the current total are June and July 2007.

The value of the U.S. equity market has grown substantially since then, however, so when expressed as a percentage of market capitalization, it's not nearly as extreme. Back then, the 12-month inflow accounted for more than 1% of U.S. market cap, versus "only" 0.5% now.

In the past, when there has been a big foreign inflow to domestic stocks, the S&P 500 tended to fare well in the months ahead, even though several of them preceded trouble at some point.

While this data always looks troubling on a chart, when we look at the numbers, it hasn't been a reliable reason to become cautious about future returns. By the time foreign inflows reached 0.5% of market cap over the trailing 12 months, the S&P 500's risk/reward over the next 1-2 years was heavily positive, with a greater chance for an abnormally large gain than loss up to 2 years later. While its average return wasn't anything special, it showed only a single loss across most time frames.

If and when this inflow reaches 1% or so of the value of all U.S. stocks, then it might be time to become more concerned.