Major U.S. indexes are approaching fresh records, leaving investors facing a dilemma: Lock in this year’s startling gains or hang on for the ride.
The S&P 500 is on track for the best four-month start to the year in more than three decades, posting a 16% gain to within less than 30 points of a record. The index’s surge surprised many Wall Street banks that expected a much slower rebound from 2018’s turbulent finish.
Yet the gains have stalled in recent weeks, with swings and trading volumes dropping to their lowest levels in months. Many fund managers are holding back from adding to stock allocations or even reducing them, worried that the volatility that buffeted markets at the end of last year could return if a recent cautious shift by central banks fails to bolster global growth or if global trade frictions rise.
Alan Robinson, global portfolio adviser at RBC Wealth Management, has winnowed technology and emerging markets holdings from his portfolio, worried about valuations and slowing growth abroad.
“We’re uncomfortable with the fact that the market has shot up as much as it has,” he said. “At this point, if you think, ‘Do we swing for the fences or pull up stakes?’ I believe you have to do the latter.”
Allocations to stocks are still slightly below their long-term average, a Bank of America Merrill Lynch April survey of fund managers showed.
chief investment office said Friday it had closed its overweight position in U.S. stocks relative to government bonds, betting that the market’s gains will slow over the next six months.
Data from EPFR Global showed that bond funds tracked by the firm took in $14.3 billion in early April, their biggest weekly inflow since early 2015. Asset managers in an Institute of International Finance survey said they expect their clients to cut exposure to developed market stocks and corporate bonds, while other investors have snapped up exchange-traded products that offer insurance against a spike in market volatility.
The wariness toward stocks highlights the increasingly difficult choice facing money managers in recent months. While limiting exposure to equities has proven a losing strategy over the past decade, many worry about staying heavily invested in stocks during what appears to be a late stage of the economic cycle, with markets at record highs and stocks trading at comparatively rich valuations.
Investors have been studying profits at S&P 500 companies, which as of Thursday were expected to fall 3.9% from a year ago, according to FactSet. Signs of weakening profits would be a confirmation of concerns that global growth is set to falter in the coming months, some analysts believe.
Meanwhile, a popular metric pioneered by Nobel Prize-winning economist Robert Shiller shows that valuations are hovering near their highest level in almost two decades, though they have retreated from their highs of early 2018.
Some of the year’s big gainers include
, both up more than 60%, and Netflix Inc., whose shares have risen more than 30%.
“There are plenty of reasons for short-term caution,” said Erik Knutzen, multiclass chief investment officer at Neuberger Berman. Concerns over valuations and earnings have led Mr. Knutzen to trim his exposure to U.S. stocks, hoping to raise his allocation if prices dip.
“The volatility we saw last year hasn’t magically gone away,” he said. “We are in a lull, rather than a long-term condition.”
Plenty of investors believe there are few risks that appear imminent and expect the rally to continue.
Major central banks have signaled markets that monetary policy will remain accommodative for the foreseeable future, while the U.S. and China appear closer to reaching an agreement on trade. Even though global economic readings have shown uneven growth, much of it has improved over the past several months.
“The data in December and January was unambiguously awful,” said Megan Greene, chief economist at Manulife Asset Management. “A lot of that has started to look better.”
Ms. Greene is looking for signs that China’s monthslong effort to stimulate growth is finally bearing fruit. A stronger Chinese economy would likely ripple out to other important regions, like Japan and Germany, giving global growth a boost, she said.
“If Chinese stimulus measures start showing results, the conversation we are having at the end of this year will be much different than the one we were having in January and February,” she said.
Others, however, are worried about the U.S. economy growing too quickly. While growth tends to increase corporate earnings and lift share prices, a surprise acceleration in inflation could spur the Federal Reserve to raise interest rates—something few investors expect now.
Recent U.S. data has bolstered that view. Retail sales in the U.S. bounced back in March after a stretch of weak spending, data showed Thursday, another sign that first-quarter growth was stronger than expected.
The Atlanta Fed’s GDPNow Tracker on Friday forecast first-quarter growth of 2.8% for the U.S. economy, up from an outlook of nearly 0.2% in mid-March.
Axel Merk, president of Merk Investments, believes there is a risk that inflation will rise this year, pushing the Fed to raise rates and pressuring stocks lower. He is betting on a decline in the price of eurodollar futures, a derivative that falls in value when U.S. rates rise.
“Even if you take a positive view, at what stage should someone get cautious and more negative?” he said. “Probably, when times are good.”
Write to Ira Iosebashvili at firstname.lastname@example.org