Market strategists suggest that the remarkable stock market rally of the last three months might not be over yet. While some investors believe that this market rally isn’t trustworthy, others are confident that the path of least resistance for US stocks is higher. Economic data along with lower inflation has been a tailwind as it allowed the Federal Reserve to pause its interest rate hikes that were hurting banks. The S&P 500 is up 15% since March 13. This could mean that there is still more room for stocks to go up, provided that the investors are willing to take the risk. The doubt about stocks currently is a tell-tale sign that there isn’t too much greed in markets as investor positioning is still conservative. Investors currently have plenty of money on the sidelines to invest. The market’s momentum lures investors back from the sidelines, prompting a broader market breadth and could be sustainable provided it is less reliant on just a handful of outstanding stocks.
Jason Draho, a colleague of Bernstein’s and the head of asset allocation Americas at UBS Global Wealth Management, agreed and said that once economic data held up, investors capitulated by re-adding exposure to stocks and not just market leaders. Through the first five months of the year, just seven stocks accounted for all of the S&P 500’s year-to-date gains. However, the weak market breadth has gotten much broader in June, which has helped boost investors’ confidence in the market.
Although there will be lingering risks like a hawkish US central bank and a weaker economy, investors should now be wary of a slight pullback in the near term. That said, strategists are confident that a big market crash isn’t on the horizon. In fact, some bulls believe the opposite to be true.
Our work shows that strong starts to calendar years of this magnitude rarely lead to declines in the final seven months with above-average returns the much more likely scenario, wrote Brian Belski, the chief investment strategist at BMO Capital Markets, in a June 15 note.
Bernstein and Draho of UBS Wealth Management each highlighted fixed income, mainly higher quality debt, as attractive. Bernstein said that bond yields are near 15-year highs, which offer those who lock in those rates a sound way to diversify their portfolios. He likes high-quality corporate bonds for retirement accounts and US Treasuries as an alternative to holding cash. Within equities, Sheldon believes that small- and mid-cap companies are more attractive since they’ve underperformed their larger counterparts.
Keller said that investors can brace for a correction by buying stocks in the consumer staples and utilities sectors. They’ll only work if markets struggle, but the strategist believes it’s a solid bet to make.
