© Reuters. FILE PHOTO: A man walks past the New York Stock Exchange (NYSE) in New York City, US, July 11, 2016. REUTERS/Brendan McDiarmid
Written by Louis Kruscoff, Saqib Iqbal Ahmed and David Randall
NEW YORK (Reuters) – A few months ago, most investors feared overexposure to stocks. Now many worry that they may not have enough.
The 15% year-to-date rise has lured questionable investors back into the market. Many of those who cut back on stock holdings during the painful downturn of 2022 are shifting gears.
Last week, the National Association of Active Investment Managers’ exposure index reached its highest level since late 2021, while cash levels among global fund managers surveyed by Bank of America (NYSE: NYSE) this month fell to their lowest since January 2022.
Positioners among discretionary investors, a group of fund managers for individual investors, moved above neutral earlier this month for the first time since February, Deutsche Bank (ETR:) Data shown.
Meanwhile, options investors are buying calls — bets on the upside in stocks — at levels not seen in years. 1.8 million calls traded on the S&P 500 on Thursday, Trade Alert data showed, helping lift the one-month moving average of buy calls to the highest level in at least four years.
“If you’re fighting this market, it’s very likely that you’re exhausted,” said Emily Rowland, chief investment strategist at John Hancock Asset Management, which works to increase total equity allocations.
The recent gains have been driven by factors ranging from the US economy, which has so far avoided recession despite the Federal Reserve’s tightening monetary policy, to the growing buzz around advances in artificial intelligence.
Some Wall Street banks are revising forecasts for how high stocks will rise. Among the latest is Goldman Sachs (NYSE: ), which raised its year-end S&P 500 target to 4,500 from 4,000, citing expectations that the economy is likely to avoid a downturn in the next 12 months. The index ended Friday at 4,409.59, up 23% from its October low.
The improvement in sentiment is poised to support stocks, provided it doesn’t get too extreme, said Willie DeWitch, investment strategist at Hi Mount Research.
“The shift from pessimism to optimism is actually what gives the lifeblood to bull markets,” he said. “You get in trouble when you get to excessive levels, but…we’re not there.”
One measure of sentiment that Delwiche studies, the American Association of Individual Investors survey, showed that bullish sentiment outperformed bearish sentiment in the latest week by the widest margin since November 2021.
Delwich said continued strength in equities would be consistent with previous periods when pessimism began to fade while optimism accelerated.
History also shows that stocks tend to continue to rise after rising 20% above their lows. LPL Financial (NASDAQ:) data showed that the S&P 500 has posted an average gain of 18% in 12 months after crossing the 20% threshold.
However, some stocks are concerned that they are already overheating.
Kochuba, founder of options analysis service SpotGamma, said that while extreme levels of put option buying could support markets, they also warrant caution in the near term.
“The trend is probably higher…but in the very short term we’ve skipped slides,” he said.
Matt Stuckey, senior equity portfolio manager at Northwestern (NASDAQ:: Mutual Wealth Management Company), thinks that sentiment — as evidenced by the AAII survey — has run up quite quickly. He believes a rate hike by the Fed is likely to lead to a mild recession late this year or early 2024. The Fed left interest rates unchanged earlier this week, but said further increases could be necessary this year.
“You’re starting to see a lot of evidence that investors are chasing that rally,” he said. “We’re starting to take a little bit off the table.”
Others believe, however, that the race ahead has room to run. One encouraging sign is that more S&P 500 stocks are heading higher, as well as a handful of huge growth names like Microsoft (NASDAQ:) and Nvidia (NASDAQ::) leading the gains this year.
For example, small-cap and industrial stocks — which have long been sluggish — have outperformed so far this month, while the number of S&P 500 stocks trading above their 200-day moving average rose to two-month highs this week.
Ken Mahoney, CEO of Mahoney Asset Management, has added to positions at Microsoft and Nvidia in recent sessions. He said massive bid buying, fear of missing out on opportunities and bearish investors reversing their bets will likely continue to lift the markets for the time being.
“The market is very overheated and everyone and their grandmothers can see it, but it may be a while before we see a big explosion,” he said.