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Foreign Stocks Lose Flair

Buffett's wager has backfired thus far as the dollar has rallied. Furthermore, the U.S. economy has chugged along at a solid 3.5% clip, more than double that of Japan and almost triple Europe's growth rate.

But despite Buffett's blunder and a world-beating U.S. economy, the U.S. fascination with foreign stocks has continued unabated. About 70% of all fund flows this year have been directed toward foreign stocks, according to Biderman, even though they make up less than 20% of the world's equity assets.

"The massive inflows have extended foreign stock valuations to untenable levels," says Biderman.

Multiples may be stretched and stocks may be sliding, but that still has not entirely dissuaded Americans from sending their money overseas. According to TrimTabs, foreign funds have taken in $5.6 billion this month through Oct. 19, while inflows into domestic funds were $3.6 billion.

ETF inflows month-to-date, though, are showing a different, and perhaps more telling, story. U.S. ETFs have taken in $5 billion thus far vs. $1.8 billion for foreign ETFs, the first time in five months the scales tipped in favor of the U.S.

Alec Young, equity market strategist at Standard & Poor's, says U.S. inflation fears, which finally hit the headline consumer price index earlier this month, are pushing stocks worldwide lower. And when that happens, foreign stocks, especially those in emerging markets, are inherently more volatile than the S&P 500.

"Foreign stocks, especially emerging markets, are by nature more volatile," says Young. "They outperform during bull markets, but get hurt even more during corrections."
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