(Bloomberg) – Warnings are growing louder that the relentless rise in US stock prices is going to falter.
Strategists from Goldman Sachs Group, Morgan Stanley and Citigroup issued new letters on the possibility that negative impacts could reverse a winning streak. The spread of the delta variant of the coronavirus, a weak recovery in global growth or actions by central banks to reduce stimulus programs of the pandemic era pose risks.
“Elevated valuations have increased the fragility of the market,” Christian Mueller-Glissmann, managing director of portfolio strategy and asset allocation at Goldman Sachs, said in an interview. “If there is a new negative event, it could cause growth disruptions leading to a rapid reduction in risk.”
Positioning has turned ultra bullish, with long positions in the S&P 500 index outnumbering short positions by almost 10 to 1. Half of those bets are likely to face losses from a drop in the index of just 2 ,2%. And even a small correction could be amplified by a lengthy forced sell-off, Citigroup strategists led by Chris Montagu warned.
Less exposure to the stock market
Morgan Stanley slashed US stocks to underweight and global stocks to equivalent weight on Tuesday, citing “huge risk” to growth through October. Credit Suisse Group, meanwhile, said it maintains a slight underweight on US equities for reasons such as extreme valuations and regulatory risk.
While no one is predicting a strong sell-off, a compulsive stock buying over the summer has left investors with too much exposure and vulnerable to any hint of bad news. After seven straight months of gains in the S&P 500 Index, the longest streak since January 2018, many see stocks poised for a September pullback.
The citizens, behind the climbs
Retail investors are seen as the key force behind the recent gains. They invested nearly $ 30 billion in cash in US stocks and ETFs in July and August, the most in a two-month period, according to JPMorgan Chase. They could also be the basis that could keep the market stable, as long as expansionary monetary policies are maintained, according to JPMorgan.
“Retail investors have been buying stocks and stock funds at such a steady and strong rate that it makes a stock correction seem quite unlikely,” JPMorgan’s global strategists, including Nikolaos Panigirtzoglou, commented in a Sept. 1 note. “It remains to be seen whether the upcoming Fed policy change alters the attitude of retail investors toward equities.”
The eyes on central banks
Those attitudes will eventually be put to the test by monetary policymakers at the Federal Reserve and the European Central Bank, who are laying the groundwork for scaling back asset purchase programs.
While traders don’t expect news of the Fed’s phasing out of stimulus beginning until November at least, and a rate hike much later, it wasn’t that long ago that rate hikes hampered another bull market in 2018.
Technical signals also point to a downside, with momentum and volatility suggesting that institutional sentiment is overheated, according to an analysis by Bloomberg Intelligence.
VIDEO | Bitcoin: 4 keys to understanding the largest of the cryptocurrencies and what risks it has
Nota Original:Wall Street Braces for Stumble in U.S. Stocks on Relentless Tear
More stories like this are available on bloomberg.com
Subscribe now to stay ahead with the most trusted business news source.
©2021 Bloomberg L.P.