Strategists mull pullback in stock market amid recent shakin
By Jessica Toonkel
Dec 11 - Market strategists believe the recent volatility in stocks could be a precursor to a correction in coming months, though most Wall Street analysts expect markets to remain relatively upbeat.
BMO Private Bank in Chicago said it may soon scale back its equity exposure in its portfolios. The firm, which has $66 billion under management, has been overweight U.S. large-cap equities throughout 2014, but its chief investment strategist, Jack Ablin, is worried that stocks have gotten too expensive.
"I think U.S. equities have become a victim of their own success and they have gotten pretty expensive," Ablin told Reuters. "I would argue the last time that U.S. large-caps were fairly-valued was in the second or third quarter of 2013."
While most investment strategists are bullish on U.S. equities, a number agree with Ablin that the first quarter of next year could see some bumpiness. As of Thursday afternoon, the S&P 500 was about 1 percent away from its closing record of 2075.37, reached on Dec. 5.
The S&P has gained 11 percent this year - and currently sports a price-to-earnings ratio of 16.2, above the historic average of about 15. Bullish sentiment as measured by the American Association of Individual Investors has been above its historic average for 17 of the last 18 weeks.
Ablin said if he starts to see momentum wane, BMO will cut equity exposure by 10 percentage points off its high volatility allocations across its strategies and move into cash.
For now, Ablin is sitting tight. "As long as the 200-day moving average is rising at an annualized rate of 13 to 14 percent a year, we will stay where we are," he said.
Other strategists agreed the first quarter of 2015 could be volatile. Jim Paulsen, chief investment officer at Wells Capital Management in Minneapolis, which has $338 billion in assets under management, said he expects some kind of correction in the next few months as markets react to the end of the Fed's quantitative easing policy.
"To think we are going to unwind this without any market turbulence is unrealistic to me," Paulsen said.
Since September, Wells has cut its maximum overweight toward equities. Going forward, Paulsen is discussing staying overweight stocks, but diversifying more to be overweight in international and emerging markets equities.
Dan Greenhaus, strategist at brokerage BTIG LLC in New York, expressed similar caution.
"We think people should be long, but long on guard," Greenhaus said in an interview. "The bias for stock prices is higher over the next 24 months, but it is unlikely to be as good as the past 24 months."
Even long-term bull Jeffrey Saut, chief investment strategist at Raymond James Financial in St. Petersburg Florida, believes that there will be some weakness in equity markets early next year.
"I think we are in a secular bull market that has another eight to 10 years ahead of it," he said.