(Bloomberg) -- The S&P 500 is up 18% and powering toward its biggest first half since 1997. For bulls, things are great. Will they get any better?
To a handful of cross-asset strategists who turned skeptical on stocks before this week’s manic sessions, that’s becoming the most pressing question. Increasingly, their answer is: not likely.
However spectacular the real-time reaction -- almost 90% of S&P companies are in the green and investors just pushed the index to a record -- gestures like Federal Reserve Chairman Jerome Powell’s dovish pivot don’t engender confidence for the long term, says Sophie Huynh, a cross-asset strategist at Societe Generale in London. They ring more as a warning, she says, perhaps marking the beginning of the end to economic and market cycles that have lasted a decade.
“It’s too late to be bullish,” Huynh said. “The Fed starts to consider rate cuts, equities should start to reflect slower growth momentum, and investors should start to cut earnings expectations. But that hasn’t impacted equities yet.”
U.S. stocks surged for a fourth day Thursday, with the S&P 500 rising 1% to its first record since April. The Dow Jones Industrial Average closed within 0.3% of its October high. Futures on the gauges were down 0.2% and 0.1% respectively as of 7:10 p.m. in New York. Speculation the Fed and other central banks are about to add stimulus to the global economy has been a boon for financial products everywhere, with the 10-year U.S. Treasury yield dropping below 2% for the first time since November 2016.
Huynh’s arguments aren’t new. She says valuations are stretched while earnings stagnate, a sign “fear of missing out” has blinded traders to deteriorating fundamentals. Her team cut its recommended global stock allocation to 35% from 40% about two weeks ago and said nothing that has happened since has altered the view.
As is true for most equity bears, the relentless decline in Treasury yields provides reason enough to lighten up on stocks, pointing to gathering economic weakness. And while Powell’s dovishness has been enough to revive financial markets, expecting monetary policy to do the same for the economy is asking too much.
“At this stage of the economic cycle, you’re either going to have a recession next year or a cyclical slowdown,” she said. “If the Fed cuts rates, do you think we’ll see a global growth recovery? It’s not the case.”
Much of the view is shared at Deutsche Bank Securities in New York. Dokyoung Lee, who helps manage about $1.5 billion in the firm’s multi-asset portfolio in the Americas, has been trimming his overweight position in global equities since April and turned underweight equities in May. He’s now 5% underweight global stocks, while increasing his allocation to bond-like REITs and infrastructure stocks.
Likewise, Lee doesn’t regret making the underweight call just before the Fed decision sent everything higher.
“If you take a cold look at what’s going on and ask yourself about what exactly has changed, it’s not much. You still have a trade dispute with China and it’s not going to be easy for stocks,” Lee, head of multi-asset strategies in the Americas at Deutsche Bank Securities, said by phone from New York. “We have a lot of the same issues that we had going into yesterday. They won’t turn around on a dime.”
There are the factors that won’t go away even if Donald Trump and Chinese President Xi Jinping come closer to a trade agreement at the G-20 summit next week. Economic data in the U.S. isn’t stellar, a key manufacturing gauge is in contraction in most of the regions globally, a stock market rally comes amid minuscule fund flows, which hedge funds trimming their stock allocation to the lowest level in about five years.
Investors have pulled $152 billion from emerging and developed equity mutual and exchange-traded funds this year, strategists at Bank of America Corp say in citing EPFR Global data. About a third of the money was yanked from the U.S. passive and active funds.
“It’s not a time to be greedy,” Lee said. “Not at all.”
(Updates with futures in fifth paragraph.)
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