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Wall Road Week Forward: Traders change into cautious as shares hit new highs

© Reuters. The New York Stock Exchange (NYSE) logo can be seen on the door on March 18, 2020 in New York, USA. REUTERS / Lucas Jackson

By Saqib Iqbal Ahmed

NEW YORK (Reuters) – Investors arm their portfolios for potential stock market volatility even if stocks float near new highs after seven consecutive months of profits.

Utilities are the best-performing sector so far this quarter, up 10.2%. They were followed by other popular destinations for nervous investors, including real estate and healthcare.

In the derivatives markets, the price difference between the front month Cboe Volatility Index futures contract and the contract itself is greater than it has been about 85% of the time over the past five years. This suggests that some investors expect the calm in stocks to give way to greater volatility in the coming weeks and months.

Meanwhile, the Japanese yen and Swiss franc – viewed as havens in uncertain times – outperformed most G10 currencies this quarter.

"It's been a year of positive returns, but it's a bull market with fairly defensive overtones," said Saira Malik, head of global equities at money manager Nuveen Investments.

The demand for protection against price losses illustrates a mystery that has puzzled investors at various times during the post-pandemic surge.

The extremely low bond yields have left few alternatives to stocks, and betting on stocks has been a disastrous strategy for the past year and a half.

Stocks demonstrated their resilience on Friday as the S&P appeared to be shaking off a major failure in August US employment data as some market participants bet that a weaker economy could undermine the Federal Reserve's arguments to ditch its easy money market support policy shortly Months. The benchmark index is up 20.4% this year.

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

"It's been a wonderful ride for US equities … but we believe the picture will be a little different going forward," said David Grecsek, managing director, investment strategy and research and partner at Aspiriant, at approximately 14.5 Billion dollars.

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

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

Investors will be keeping an eye on the video game retailer's quarterly results next week GameStop Corp. (NYSE 🙂 whose wild ride this year put the spotlight on retail investor mania for so-called meme stocks, which some say are a sign of irrational exuberance in the markets.

On the macro front, US producer price index data from August next week may provide some clues as to how inflation is headed after July saw its largest annual rise in over a decade.

As the delta version of the coronavirus continues to hamper growth, "many investors may see some headwind and position themselves more defensively," said Ross Mayfield, investment strategist at Baird in Louisville, Kentucky.

Analysts at Morgan Stanley (NYSE 🙂 last week reduced their estimate of the US gross domestic product in the third quarter from an increase of 6.5% to an increase of 2.9%.

Some of the inflows into defensive sectors may have more to do with investor returns than concerns about an impending market crash.

The S&P 500 Utilities index is returning around 3%, while the benchmark 10-year US Treasury bond yield was around 1.33% on Friday.

"The wall of concern is looming on the horizon … but the main reason defensive (stocks) hold up relatively well is because of the revenue streams involved," said Terry Sandven, chief equity strategist at the U.S. Bank wealth management.

Sandven, Nuveens Malik and Bairds Mayfield remain bullish on stocks despite the market's defensive undertone.

The story may be on their side: The S&P has recorded double-digit annual profits for eight of the last 10 years, which rose by 20% or more in the period from January to August, as it did in 2021, according to a report by BofA Global Research. Exceptions were 1929 and 1987, both of which were marked by historic stock market crashes.

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