(Bloomberg) – They waited and waited and then went all in. And now, money managers finally surrendering ahead of the shocking stock rally of the first half of the year must reckon that their best days are over.
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Just as a measure of investor exposure to stocks surged to its highest level since April 2022, worries about a moody Federal Reserve and mounting recession fears halted the S&P 500's longest weekly winning streak since 2021. The benchmark index slipped 1.4% over the four days as of the Nasdaq 100 lost 1.3%.
Whether it's just a breather from an extended climb or a summit, the jolt comes at an awkward time for laggards who have for months resisted the lure of a tech rally that looks fragile amid the threat of an economic slowdown .
“While we have time, it's important to be a part of market movements in the short term,” said Nathan Thooft, global head of asset allocation at Manulife Asset Management in Boston, who has increased his exposure to technology stocks in the last three months. “Late cycle investing is notorious for this dilemma: when to be defensive while participating when markets are performing better than expected?”
Staying offside — or explaining to clients why you've endured a 40% rally — is the conundrum facing investors who may have already missed out on the biggest gains.
“As markets rise, more fund managers are joining the fund for fear of being fired,” said Fahad Kamal, chief investment officer at SG Kleinwort Hambros Bank Ltd.
Kamal has become increasingly optimistic since exiting his underweight position in global equities in March. He's not deterred by the fact that as the rally grew, more investors flocked to the rally — on the contrary, he says it's a sign of staying power.
“The odds have shifted in favor of a real rally,” he said. “A lot of people were on the sidelines and made money for a long time. Ironically, this could give the rally much more leeway to continue.”
Retail investors were excited about stocks ahead of this week's decline. They rallied $4.4 billion worth of shares in the week ended Tuesday, according to public stock market data from JPMorgan Chase & Co., a pace two standard deviations above the 12-month moving average.
And sentiment is bullish. A Goldman Sachs Group Inc. index of views on equities rose this month to its highest level since April 2021. A survey of the 60 largest wealth managers by HSBC Holdings Plc shows that their more distant views, as well as the near-term Moods have become somber topped up.
Whether it's the promise of productivity gains from artificial intelligence or the prospect that corporate America can continue to deliver earnings growth in line with long-term averages, there are valid reasons for the stock rally.
That helped attract $19 billion into tech stocks over the previous two months, according to Bank of America strategists, citing data from EPFR Global. This prompted rapid outflows of $2 billion in the week ended Wednesday, the largest in 10 weeks.
There are many reasons for caution that some investors are now heeding. These include a severely inverted yield curve, widening credit spreads and central bankers warning that they are far from done with the most aggressive rate hikes in decades. Valuations don't help: US tech stocks are trading at 28 times forward earnings, about 40% above the 10-year moving average.
And yet fund managers have been effectively forced into a market that has been showing the first signs of fragility for weeks. Pictet Asset Management increased its exposure to technology stocks to overweight from neutral in late May, despite lamenting that inflated stock valuations reflect “euphoric” risk appetite.
“While we don't see any clear negative catalysts in the near term, a renewed acceleration in economic momentum appears unlikely,” said Luca Paolini, the company's London-based chief strategist.
Then there's a chance that any weakness will be seen as a buying opportunity for anyone who missed out on gains in the first half of the year. Take Friday, when a slew of data added to recession fears and the Nasdaq 100 fell as much as 1.5%. It ended down just 1%.
“We could well see a correction, a period of consolidation. But we think a lot of people missed the rally and are tending to think about where we are in this cycle and maybe embrace the weakness,” said Nancy Curtin, chief investment officer at AlTi Tiedemann Global.
– With the support of Sujata Rao.
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