Investors are wary as stocks peak

(In the September 3 story, the current S&P 500 gain is corrected to 21% instead of 20.4%, paragraph 8)

NEW YORK (Reuters) – Investors are making up their portfolios for potential stock market volatility, even as stocks hover around new highs after seven consecutive months of gains.

Utility companies are the best performing sector of the S&P 500 this quarter, with a gain of 10.2%. They have been followed by other popular destinations for nervous investors, including real estate and health.

In the derivatives markets, the price difference between the futures contract of the Cboe Volatility Index and the VIX index itself is higher than it has been approximately 85% of the time in the last five years. This suggests that some investors expect the calm of the shares to give way to sharper price changes in the coming weeks and months.

Meanwhile, the Japanese yen and Swiss franc, seen as paradises at uncertain times, have outperformed most G10 currencies this quarter.

“It’s been a year of positive market returns, but it’s a bullish market that has quite a few defensive nuances,” said Saira Malik, global equity head of money manager Nuveen Investments.

Demand for downward protection illustrates an enigma that has affected investors at various times during the post-pandemic rise of the market.

The ultra-low yields of fixed income have left few alternatives to equities and betting on equities has been a disastrous strategy for the last year and a half.

Shares showed resilience on Friday, when S&P seemed to set aside big U.S. employment data in August, as some market participants bet that a weaker economy could lower the case because the stock Federal Reserve would develop its easy money market support policies. months. The benchmark is up nearly 21% this year.

At the same time, many have been bothered in a market that has spent 292 calendar days without a drop of 5% or more, nearly three times the average since World War II, according to CFRA’s Sam Stovall. Rising valuations, declining economic growth and signs of speculative excess have only added to their concerns.

“It’s been a wonderful journey for American equities … but moving forward we think it’s going to be a little different,” said David Grecsek, CEO and investment strategy and partner at Aspiriant, which manages approximately $ 14.5 billion.

Concerns about equity valuations have caused Grecsek to take profits in some of its equity positions and transfer money to non-US equities, including emerging markets.

According to Refinitiv Datastream, the price-benefit ratio of S&P 500 at 12 months is 21.3, a premium of 35% over the 20-year average.

Next week, investors will be watching the quarterly results of video game retailer GameStop Corp., whose wild run this year highlighted retail investors ’craze for so-called meme stocks that some say are a sign of irrational exuberance in markets.

In the macroeconomic realm, data from next week’s U.S. producer price indices could provide some clues as to how inflation is shaping up after July shows the biggest annual increase in a decade. .

With the Delta variant of the coronavirus continuing to hinder growth, “many investors see perhaps some headwinds and position themselves more defensively,” said Ross Mayfield, Baird’s investment strategist in Louisville, Kentucky.

Morgan Stanley analysts last week downgraded their vision for third-quarter U.S. gross domestic product to a 2.9% gain from a 6.5% increase.

Some of the flows to the defensive sectors may have more to do with investors seeking returns rather than concerns about an impending market crash.

The S&P 500 Utilities Index returned about 3%, while the yield on the U.S. 10-year treasury note stood at around 1.33% on Friday.

“The wall of concern is on the horizon … but the main reason why defense (stocks) are staying relatively well is because of the revenue stream,” said Terry Sandven, chief strategist at US Bank Wealth Management equity.

Sandven, Malik from Nuveen and Mayfield from Baird remain bullish, despite the defensive tone of the market.

History may be on their side: the S&P has maintained a double-digit annual gain in eight of the last ten years, which rose 20% or more in the period from January to August, as it did in 2021, according to a BofA Global Research report. The exceptions were in 1929 and 1987, which marked both historic falls in the market.