The Trump market rally has continued well past when many analysts suspected it would collapse, but that still doesn't mean that it will go on forever. U.S. stocks have managed to gain a whopping $1.5 trillion in overall market value so far this year. However, hedge funds are showing signs of fear that this rally will end, and possibly soon. In fact, the behaviors of many hedge funds point to the possibility of severe turnarounds in the market in the coming weeks or months. Here is a closer look at what hedge funds are doing to signal this change of opinion.
Bullishness is Moderated
In a report by Bloomberg which detailed hedge fund buys and sells so far in 2017, the results show that many hedge fund managers have tempered their previously bullish positions. In so doing, many funds are extricating themselves from U.S. stocks, and they are accomplishing this by selling bank shares, which tend to be highly sensitive to the broader economy, as well as raw materials such as copper. This data was provided by a report by Group AG of Credit Suisse, which also found that the same funds tended to be buying up gold once again.
This constitutes a major change since the end of 2016, when most funds were increasing their overall exposure to U.S. stocks and financials in particular. Going along with the rally which had been in place since November, these funds were boosting their positions to ride the growing figures.
So what could be causing the shift away from bullish bets? According to analysts at Alpha Theory LLC, a strategy firm cooperating with hedge funds managing a total of $6 billion, one simple reason could be prudent management strategies. Funds are now seeing a profit for the first time in a long while, and now moving in the opposite direction seems a safer maneuver.
At the same time, economic signs are difficult to read at this point. On the one hand, U.S. equity averages have reached record levels, and consumer sentiment is continuing to improve. Still, overall economic data is mixed at best, and consumer spending increased by a lower rate than what had been forecast for the month of January. The Fed is also likely to raise interest rates in the near future, which could have a major impact as well. On the other hand, the yield curve rate, representing the distance between two- and 30-year interest rates, is at a low level, which indicates only limited potential for both growth and inflation. Perhaps hedge funds are looking to these and other signs and deciding it is better to be safe and hedge their bets than to risk losing what they've managed to gain in recent weeks.