Taking Their Investments Elsewhere

The Treasury on Tuesday released its estimates of international capital flows into and out of the United States, and they indicate that foreigners were net sellers of $40.2 billion of American stocks in 2013. That is hardly a large amount, but it is the first year since 1992 that they were net sellers.

Historically, foreigners have been considered to be contrary indicators in almost every stock market around the world, on the theory that they are less familiar with the market than are local investors, and more likely to buy at the top, after prices have been bid up to levels that could be unsustainable, and to sell at the bottom, after the local investors have fled, sending prices down.

Source: United States Treasury, via Haver Analytics.

The two years with the largest inflows of foreign money into American stocks were 2000 and 2007 â€" both years that the market hit historic peaks and began large declines. That would seem to confirm the theory.

Since the figures began to be estimated in 1979, the only previous years for net sales were 1984, 1988, 1990 and 1992. The Standard & Poor’s 500-stock index rose in each year after those sales, providing more evidence that foreigners tend to have poor market timing. Those periods of net foreign selling tended to follow periods of stock market weakness, such as the 1987 stock market crash or the 1990 recession, which reasonably could have scared investors.

But the 2013 sales came during one of the strongest years for the stock market in years, with the S.&P. 500 rising nearly 30 percent. And the market had been strong in the previous year as well. So this selling did not reflect recent market weakness.

Perhaps the explanation lies in a broader context. During the 1980s and early 1990s, there was widespread pessimism regarding the ability of the United States to compete with Japan, the rising economic power of that era. That pessimism proved to be unfounded, but it made investors nervous.

In the current era, there is worry that the United States cannot compete with the Chinese, and to a lesser extent with other emerging Asian economies. Perhaps the 2013 selling reflected pessimism about the country’s future, coupled with concern over the country’s ability to govern itself. The heaviest selling came during the summer, amid talk of a government shutdown or default, and during the last two months of the year, after the partial shutdown occurred in October.