Wall St Week Ahead Investors Beware As Stocks Reach New Highs

NEW YORK, Sept. 3 (Reuters) – Investors are bracing their portfolios for potential stock market volatility, even as stocks approach new highs after posting seven straight months of gains.

Utilities (.SPLRCU) is the best performing sector in the S&P 500 so far this quarter with a gain of 10.2%. They were followed by other popular destinations for nervous investors including real estate and healthcare.

In derivatives markets, the price spread between the first month Cboe Volatility Index futures contract and the VIX index itself (.VIX) is higher than it was around 85 % of the time in the past five years. This suggests that some investors expect the calm in equities to give way to more pronounced price swings in the weeks and months to come.

Meanwhile, the Japanese yen and Swiss franc – seen as safe havens in times of uncertainty – outperformed most G10 currencies this quarter.

“It’s been a year of positive market returns, but it’s a bull market that has some pretty defensive undertones,” said Saira Malik, head of global equities at fund manager Nuveen Investments.

The demand for downside protection illustrates a conundrum that plagued investors at various points during the post-pandemic market surge.

Ultra-low yields on fixed income have left few alternatives to stocks, and betting against stocks has been a disastrous strategy for the past year and a half.

Stocks demonstrated their resilience on Friday, when the S&P appeared to ignore a big mistake in August’s US employment data, as some market participants bet that a weaker economy could undermine the Federal Reserve to reverse its easy money policies favorable to the coming market. month. The benchmark index is up 20.4% this year. Read more

At the same time, many have become nervous in a market that has lasted 292 calendar days without a drop of 5% or more, nearly three times the average since World War II, according to data from CFRA’s Sam Stovall. Rising valuations, declining economic growth and signs of speculative excess only added to their concerns.

“It’s been a wonderful run for US stocks… but going forward we think the situation will be a little different,” said David Grecsek, Managing Director of Investment Strategy and Research and Partner at Aspiriant. , which manages around $ 14.5 billion.

Concerns about stock valuations prompted Grecsek to take profits on some of its equity positions and shift some of the money to non-US stocks, including emerging markets.

According to Refinitiv Datastream, the 12-month price-to-earnings ratio of the S&P 500 forward is 21.3, a 35% premium over its 20-year average.

Next week, investors will keep an eye on the quarterly results of video game retailer GameStop Corp (GME.N), whose mad rush this year has highlighted retail investor mania for so-called stocks even as some. say to be a sign of irrational exuberance of the markets.

On the macroeconomic side, US producer price index data for August next week could provide clues to the way inflation is going after July posted the largest annual increase since over a decade. Read more

With the Delta variant of the coronavirus continuing to hamper growth, “many investors may be seeing headwinds and positioning themselves more defensively,” said Ross Mayfield, investment strategist at Baird in Louisville, Ky.

Over the past week, analysts at Morgan Stanley reduced their view of third-quarter U.S. gross domestic product to a gain of 2.9%, from an increase of 6.5%.

Some of the flows to defensive sectors may have more to do with investors looking for yield rather than concerns about an impending stock market crash.

The S&P 500 Utilities Index (.SPLRCU) returned around 3%, while the benchmark 10-year US Treasury Index returned around 1.33% on Friday.

“The wall of worry looms on the horizon… but the main reason defensive stocks hold up relatively well is the income stream attached to them,” said Terry Sandven, chief equities strategist at US Bank. Wealth Management.

Sandven, Nuveen’s Malik and Baird’s Mayfield all remain bullish on stocks, despite the market’s defensive undertone.

History may be on their side: The S&P has maintained a double-digit annual gain for eight of the past 10 years, increasing 20% ​​or more between January and August, as in 2021, according to a BofA report. Global Research. The exceptions were 1929 and 1987, both marked by historic stock market crashes.

Reporting by Saqib Iqbal Ahmed; Editing by Richard Chang

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