With assets of all stripes rallying and the S&P 500 Index approaching fresh records, investors are facing a dilemma: stay in or get out.
Surging U.S. stocks, Treasuries and gold prices have come to the brink of simultaneously notching record highs for the first time in history, while rallies in once beaten-down assets like oil, financial stocks and the euro have accelerated. The S&P 500 is up 50% from its late March lows.
“We are in the ‘bull everything’ trade,” said Christopher Stanton, chief investment officer at Sunrise Capital Partners. “There are very few losers. Only laggards.”
The broad-based gains have presented investors with a conundrum. While many are uneasy owning assets that appear richly valued or trade at record highs, holding too much cash or an outsize allocation to underperforming stocks has hampered portfolio performance during the recent rally.
Another concern is the possibility of a broad reversal where assets that appreciated in tandem sell off simultaneously, leaving investors with few places to shelter.
Such market action was seen at various times during the coronavirus-fueled sell-off in March, when gold, stocks and Treasuries tumbled together as frightened investors went to cash.
STAYING THE COURSE
Plenty of investors believe the rallies are likely to continue as long as interest rates remain low and the Federal Reserve keeps pumping out stimulus - factors that have benefited everything from technology-related stocks to commodities such as oil and gold.
And while some investors worry that the S&P 500 has become increasingly skewed towards technology and communication services - which make up about 39% of the benchmark index’s market capitalization - these sectors also accounted for about 39% of the index’s second-quarter earnings, according to IBES data from Refinitiv.
“We still like businesses that are tech-focused and creating efficiencies in a post-COVID world,” said Conor Delaney, chief executive of financial advisory network Good Life Companies.
Among his holdings are shares of Zoom Video Communications Inc, a bet that the shift to work-from-home prompted by the coronavirus is unlikely to reverse anytime soon.
Meanwhile, a 9% decline in the Dollar Index from its high this year has given another tailwind to gold, which is denominated in the U.S. currency and becomes cheaper to foreign buyers when the greenback depreciates.
George Gero, managing director at RBC Wealth Management, has periodically advised clients to raise allocations in the haven metal to hedge against everything from political uncertainty to a future surge in inflation.
“We are staying the course,” he said. “I believe gold goes higher.”
Others believe the answer is to sell now and wait for things to get cheaper.
Analysts at BofA Global Research noted that August kicks off what has historically been the weakest three-month stretch of the year for equities, where the average historic return stands at about 0%, according to the bank’s data.
Investors pulled a net $6.5 billion out of U.S. equities in the last week, the largest outflows in a month-and-a-half, the bank said.
Persistent buying on dips and wild rallies in the shares of companies “that make no sense” have convinced Sebastien Galy, senior macro strategist at Nordea, that markets may be entering a euphoric phase that tends to precede corrections.
“We have been telling our investors they should lighten positions slowly and prudently,” he said.
Other potential flashpoints for volatility include a reversal of the dollar’s downtrend, a worsening coronavirus outbreak or a contested U.S. presidential vote, investors said.
THE VALUE OF VALUE
Some have shifted their orientation to so-called value stocks, which are concentrated in economically-sensitive sectors that have tended to mount powerful rallies during rebounds from recessions.
John Stoltzfus, chief investment strategist at Oppenheimer Asset Management, owns financial and industrial stocks alongside technology shares in hopes that a COVID-19 vaccine will spur economic recovery next year.
Past rebounds in value names have often come at the expense of momentum stocks, said Solomon Tadesse, head of quantitative equities strategy for North America at Societe Generale.
One such move came during a three-month stretch in 2009, when value stocks saw a 25% gain while momentum names lost about 30%, Tadesse said.
“It’s a short window and if you miss it, you miss it,” he said.
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