One market watcher is standing by his year-end S&P 500 target of 1,900, which would be a retreat from its current near-record high.Richard Drew/The Associated Press
It's hard to find much enthusiasm for the stock market right now, which is arguably the best thing going for it.
As the market approaches the halfway mark of the year with lacklustre gains, many strategists are far from confident about a second-half rally, arguing instead that stocks will likely drift sideways.
Disappointing? Perhaps. But for anyone worried about investing in a market that is dangerously overextended and driven by euphoria, the cautious forecasts come as good news: They suggest that holding on is the right move.
Brian Belski, chief investment strategist at BMO Nesbitt Burns, reiterated his year-end S&P 500 target of 1,900.
That's right, he expects the index will retreat slightly from the current near-record high of 1,924.24, as investors start to fret about the end of the Federal Reserve's bond-buying stimulus program, known as quantitative easing or QE, later this year.
"We suspected that our target was likely to be eclipsed some time during [the first half of 2014] as economic conditions improved, only to fade during [the second half] as investors grappled with the implications of a QE-less Fed," Mr. Belski said in a note.
"From our perspective, things are going according to plan so far and as a result, we are comfortable remaining patient."
Ed Yardeni, president and chief investment strategist at Yardeni Research, sounds similarly restrained in his approach to the stock market, arguing that there is a widespread fear of investor complacency. As he put it in a note, there is rising "concern about the lack of concern."
The CBOE Volatility index – or VIX, the fear gauge that tends to rise with investor anxiety – is close to a seven-year low. As well, the S&P 500 has risen more than 40 per cent over the past 19 months without a significant downturn, taking a lot of the fear out of investing.
Many observers, Mr. Yardeni observed, are worried that a so-called "Minsky moment" – where a lengthy period of speculation ends in collapse – will shatter the calm, sending volatility higher and stock prices lower.
The biggest threats are geopolitical in nature, he said, but a surprising rebound in U.S. inflation driven by falling unemployment could also trigger the downturn. "We aren't in that camp, but we are certainly watching out for this scenario."
Mark Hulbert, who tracks market sentiment through 160 newsletters at Hulbert Financial Digest, also picked up on the complacency theme. He believes that short-term market timers are far more bullish now than they were just one month ago – a contrarian indicator that suggests stocks could struggle in June.
"Perhaps the best you can say right now is that the sentiment picture is neutral from a contrarian point of view," Mr. Hulbert said. "At worst, it's slightly bearish for stocks."
Small investors are also growing worried. According to the latest asset allocation survey from the American Association of Individual Investors, cash allocations have risen to an eight-month high as investors have trimmed their equity exposure.
That's not a reflection of complacency, of course, but it offers another example of how many investors are perceiving the stock market as a less-than-ideal buying opportunity right now.
No doubt, the S&P 500 is no bargain. Its valuation based on earnings suggests stocks are fully valued. And with gains of more than 180 per cent over the past five years, it's safe to assume that the best part of the bull market is over.
But if you're worried that stocks are heading for a disaster, relax: The backdrop simply isn't that good yet.
David Berman