U.S. stock market luring investors

The U.S. stock market is outperforming the global stock market for the first time this decade, with asset managers adjusting their portfolios to take advantage of the trend.

“Our emerging market exposure has come down,” said Robert Turner, chairman and chief investment officer of Turner Investment Partners Inc. of Berwyn, Pa.

At the same time, exposure to U.S. stocks has gone up, he said.

“We’re either neutral or slightly below neutral in our international exposure,” said Jack Ablin, chief investment officer of Harris Private Bank, a unit of Harris Bankcorp Inc. of Chicago. “That’s a complete reversal from a year ago.”

Financial advisers said they have no qualms with such activity.

The Standard & Poor’s 500 stock index was down 11.10% year-to-date as of Aug. 6. It had a one-year return of -10.31%, a three-year annualized return of 3.67% and a five-year annualized return of 7.91%.

The MSCI EAFE, down 14.52% for the same period, had a one-year return of -11.02%, a three-year annualized return of 9.93% and a five-year annualized return of 15.49%.

Advisers differ on what they themselves have done.

Some, particularly active traders, began to cut their exposure to foreign markets at the end of last year, said Paul Schatz, president of Heritage Capital LLC, a Woodbridge, Conn.-based firm with $18 million under management.

That’s when “cracks began to show” in overseas markets, said Mr. Schatz.

That doesn’t mean, however, that these advisers are directing client assets to domestic stocks.

While overseas stock markets have given back more than domestic stock markets, investing in any market right now isn’t appealing, said Tom Lydon, president of Global Trends Investments, a Newport Beach, Calif.-based firm that manages $75 million in assets.

“If you look at all global and domestic stocks, most are all still trading substantially below their 200-day average,” said Mr. Lydon, a practitioner of momentum investing.

As a result, he has moved his clients’ portfolios to 80% cash.

“We have very little exposure to stocks across the board,” Mr. Lydon said.

Timing the market, however, can be tricky, said Don Martin, president of Mayflower Capital in Los Altos, Calif.

The market does appear to be in transition.

“U.S. stocks are some of the best values compared to other stocks,” said Mr. Martin, who declined to detail his firm’s assets under management.

But that doesn’t mean he will tinker with his clients’ asset-allocation mix.

Investors should remain “evenly” invested in markets, he said. If the U.S. market represents 40% of the global market, that is the percentage of U.S. stocks they should have, Mr. Martin said.

That is reasonable, said Milton Ezrati, senior economist and market strategist at Lord Abbett & Co. LLC in Jersey City, N.J. “One of the things we always advise is not to leap from one asset class to another,” he said.

But Mr. Ezrati said investors should brace themselves for overseas markets to take the lead over U.S. markets.

The U.S. economy has been in a much-documented funk for the past year and a half, owing to the housing collapse, multiple credit crises, soaring commodity prices and souring consumer sentiment, Mr. Turner said.

“But we think the worst of the funk may soon be over,” he said.

At the same time, Europe and Asia are just beginning to head into their own slowdowns, said Ed Friedman, a senior economist at Moody’s Economy.com in West Chester, Pa.

As a result, “we are more likely to recover more quickly than they do,” he said.

Emerging-market stocks are expected to underperform U.S. stocks for a number of additional reasons, industry experts said.

One has to do with valuations, Mr. Ablin said.

In 2001 and 2002, the valuations of emerging-market stocks were half that of U.S. stocks, but now they trade at a premium to U.S. stocks, he said.

That’s not sustainable, Mr. Ablin said.

It all bodes well for U.S. stocks, with some sectors benefiting more than others.

Health care and technology stocks in particular should do well, Mr. Turner said.

Health care stocks should thrive because valuations have gotten so cheap, and technology should prosper because, after years of underinvestment, technology spending is set to rise, he said.

Large-cap stocks should also shine, Mr. Turner said.

“Non-U.S. investors will come in and buy these stocks because these are global brands,” he said. “They are the companies that are managing business well.”

Large-cap stocks, however, aren’t the leaders just yet.