Undaunted by two major market reversals in 2018, a broad spectrum of investors and investment funds collectively have their biggest allocation to stocks since the peak of the dotcom bubble in the year 2000, per a report by Goldman Sachs as cited by Business Insider Prime. As the bull market has charged ahead over the past 9 years and 8 months, investors have increased their aggregate position in stocks from less than 30% of their portfolios in 2009 to 44% as of this month. The table below encapsulates highlights of Goldman's findings.
Risky Stock Exposure
|Who's Exposed: Households, Mutual Funds, Pension Funds, Foreign Investors|
|How Much Exposure: Heaviest stock allocation since year 2000 dotcom bubble|
|Cash: Record-low cash allocation, at 12% of financial assets|
|Bonds: Only 25% in bonds|
Source: Goldman Sachs, as reported by Business Insider Prime
Significance for Investors
The high current allocation to stocks seems particularly risky, given that economic and earnings growth may be peaking right now. A marked slowdown in growth, never mind a recessionary contraction, is likely to send valuations and stock prices tumbling. Moreover, after posting stellar gains during the current bull market, stocks have a long way to fall, once investors lose confidence. Indeed, Goldman's data indicate that the total allocation to equities was as low as 20% in 1991.
Meanwhile, the current 25% allocation to bonds is somewhat below the average since 1990. Given rising bond yields, it is somewhat surprising that investors haven't been induced to reduce their exposure to stocks, and begin a rotation into bonds. The table below puts the current bull market gains and more recent market performance in perspective.
Stocks Teeter After Decade-Long Run
|Recent S&P 500 Milestones||S&P 500 Value||Gain to Nov. 15|
|March 9, 2009 (low close of last bear market)||676.53||303.6%|
|Dec. 29, 2017 (last year-end close)||2,673.61||2.1%|
|Sept. 21, 2018 record high (set in intraday trading)||2,940.91||(7.2%)|
|Nov. 15, 2018 close||2,730.20||NA|
Source: Yahoo Finance
Goldman is forecasting equity returns of 5% in 2019, per Business Insider, and similar projections from other sources may be keeping equity investors in the game. Nonetheless, bonds are closing the gap, with seasoned AAA corporate bonds now yielding about 4.2%, per YCharts.com.
Goldman also anticipates that corporations will continue to be the biggest source of demand for stocks, spending $700 billion on share repurchase programs in 2019. They also project offsetting net inflows and outflows of $400 billion each for U.S. stocks in 2019. Net inflows for ETFs and from foreign investors will equal net outflows from mutual funds, pension funds and household investment portfolios. It remains to be seen whether these projections are reasonable, or if they overstate the demand for stocks in 2019.
Bob Doll, a senior portfolio manager and chief equity strategist at Nuveen Asset Management, believes that the S&P 500 is likely to revisit the October low point, before posting a modest rally through year-end, but one marked by increased volatility and ending considerably short of its record high, as detailed in another Investopedia article.
Steve Chiavarone, a portfolio manager with Federated Investors, told CNBC that he expects the market to move higher by year-end, and that "the long-term bull market remains in place," based on an economy and corporate earnings that are growing, "benign" inflation, and a belief that the Federal Reserve "won't kill the economy." He forecasts that the S&P 500 will be at 3,500 by the end of 2019, 28.2% above the Nov. 15 close. However, he added, "because we broke below those key technical levels [200-day moving averages], there is some risk of more downside."
Investors have become increasingly nervous about the tech sector, and many are utilizing put options to protect their gains. The cost of such portfolio insurance is surging as a result, as detailed in another Investopedia report. Buyers of tech stocks formerly were among the most bullish of equity investors, so their sudden bout of risk aversion may be a leading indicator of a more widespread loss of confidence in stocks. Chiavarone sees the Dec. 1 meeting on trade between President Trump and President Xi Jinping of China, and the Fed's meeting later that same month, as near-term hurdles for the market.