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US no longer 'the place to be' for investors

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Summer's over, but this may be the time to consider heading to Europe.

As the market moves into the 2013 home stretch, the strong performance of U.S. equities and mass exodus from bonds (and sting for those who let cash sit on the sidelines as they waited for the massive correction that hasn't come) positions European equities as a relative value portfolio option.

Financial advisors and market analysts don't expect investors to make major changes to allocations in the year's final quarter. However, they say, with considerable gains in U.S. stocks, rebalancing into the European recovery may be a wise bet.

Analysis of institutional investors' moves in the final quarter of the past few years shows that even with double-digit gains in U.S. stocks, big investors maintained their portfolio positions, according to Standard and Poor's. That is likely to be the case again, and it's a sound strategy for individual investors as well.

Howard Silverblatt, senior index analyst at S&P, said shareholders have sold out of profitable U.S. equity positions the past few years but did not reduce exposure to the U.S. market. Lacking a dominant risk issue this year—even if correction fears remain prevalent—Silverblatt expects a similar rebalancing approach as 2013 draws to a close.

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"I don't see people moving that much from current allocations than where they were in 2012 or 2011," Silverblatt said. "There's no excess return in bonds, and whatever you do in fixed income has to be shorter term—equities are still the best bang for your buck," he added.

Gary Thayer, chief macro strategist at Wells Fargo Advisors, doesn't expect a major shift in strategy, either. Overall, he said, investors seem less fearful than they have the past two years. "They are still cautious, but more positive than negative," he said.

Thayer expects investors to go further out on the risk horizon from here, moving from what was a balanced portfolio in recent years to a more growth-oriented approach as they continue to shed bonds. That trend, in addition to reallocation of gains from U.S. equities, should favor more international exposure in a typical portfolio.

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"In a period during which the dollar is going to be improving, that favors financial assets over real assets, stocks over bonds," Thayer said. "Domestic equity will perform better than international on a dollar-adjusted basis, but you don't want to not be in international stocks."

In fact, he said, after some impressive performance—the S&P 500's turning in two straight years of double-digit returns and up 145 percent since 2009—performance expectations for U.S. equities need to become more realistic, and that increases the need for diversification.

Nicholas Denefrio, vice president of asset management at Lenox Advisors, said that "the U.S. has been the place to be."

But, he said, though Europe debt problems linger and emerging market losses are taking a toll globally, the U.S. market can't be a "go it alone" strategy.

"U.S. equities are still a nice story going forward, but look at international—even something as simple as an MSCI EAFE Index fund," Denefrio said. "We're just seeing opportunities. ... Valuations are weak. It's kind of like selling highs in the U.S. but not selling out, just taking some gains off the table."

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Pointing out that the S&P is trading at 16 times earnings, Convergent Wealth Advisors CEO David Zier said that while a case can be made that the multiples will expand to 17 to 18 times earnings, this is the time to be diversified.

"I would make a move away from the U.S., but I don't think the U.S. market is overvalued yet," Zier said. Europe is coming out of recession, Japan hasn't had the run the U.S. has, and emerging market valuations are relatively inexpensive. "While there is still value in the U.S. market, we're seeing lots of value outside the U.S.," he said.

Lewis Altfest, CEO of Altfest, echoed the prevailing view on greater international exposure but recommends shedding bonds as the primary way to increase equity allocations.

The wealth manager isn't ready to bet on cheap emerging markets stocks yet, either. He would sell any emerging market stocks with gains and wouldn't cash out of U.S. equity positions to make changes.

"The U.S. should do well, and you want the majority of your equity allocation in the U.S.," he said. "But you also want to put more money into Europe, and it better come from bonds. And if not from bonds, emerging markets—and lastly from domestic stocks."

—By Eric Rosenbaum, CNBC.com

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