Wall of worry rebuilt as Nasdaq rout boosts cash holdings

New York: Investors are losing their nerve in the stock market amid selling that has sent some industries down the most since 2008. In the past, that’s been a signal to buy.

Global money managers raised cash holdings to a two-year high this month and say America is the worst place to invest, a Bank of America Corp. survey published last week shows. Investors have pulled about $10 billion from funds that buy US equity this month, set for the biggest outflows since August, according to data compiled by Bloomberg and the Investment Company Institute.

After embracing stocks last year for the first time since the bull market began, individuals are showing signs of reverting to the skepticism that led them to pull more than $400 billion from mutual funds from 2009 through 2012. While hedge fund manager David Tepper says caution is appropriate now, others consider the lack of exuberance a healthy sign that sets the stage for more gains.

“Walls of worry are everywhere,” Robert Doll, who helps oversee $118 billion as chief equity strategist at Nuveen Asset Management in Chicago, told Tom Keene and Michael McKee on Bloomberg Radio’s “Surveillance” on 14 May. “This is the least believed bull market that I’ve ever seen. From here it’s earnings, it’s fundamentals, it’s can the economy grow? And my guess is the answer to that question is yes.”

Money flows

Since 2000, there had been 12 instances when money flows to equity funds turned negative following at least three months of deposits. On average, the S&P 500 was 2.2% higher 60 days later, compared with a mean increase of 0.6% for all comparable periods, according to data compiled by Bloomberg.

The S&P 500 was little changed last week after reaching an all-time high of 1,897.45 on 13 May. Since early March, the Russell 2000 Index of smaller shares has fallen 8.8% and the Nasdaq Internet Index is down 18% as investors exited stocks with the highest valuations.

The S&P 500 added 0.1% to 1,879.91 at 9:50am in New York on Tuesday.

The Internet gauge has slipped 1.2% in May, poised for a third month of declines, the longest stretch since 2008. About one-fifth of Nasdaq-listed shares, including Seattle-based Amazon.com Inc. and Whole Foods Market Inc. in Austin, Texas, dropped more than 20% this year.

“People are a little bit concerned that something could be on the horizon,” Eric Schoenstein, co-manager of the $5.3 billion Jensen Quality Growth Fund in Portland, Oregon, said by phone on 15 May, referring to a potential market crash similar to those that began in 2000 and 2007. “Investors are skittish and that probably makes sense because it lengthens the bull market.”

Holding cash

Tepper, founder of $20 billion hedge-fund firm Appaloosa Management LP, urged investors last week to hold some cash and focus on avoiding losses rather than making profits. The US economy isn’t expanding at a sufficient pace and financial markets are “dangerous,” he said at the SkyBridge Alternatives Conference in Las Vegas on 14 May.

The concern was echoed by Bank of America’s survey of 218 global money managers, who cut US equities in the past month and boosted cash holdings to the highest level since June 2012. Funds held an average 5% in cash, according to the survey, which was conducted during the week through 8 May.

“When you see this type of downdraft in very visible names, people’s risk averse attitude tends to take over,” Margie Patel, who oversees about $1.4 billion at Wells Capital Management in Boston, said by phone on 15 May. “After the economic crisis, a lot of investors were traumatized. People are more looking at preserving their assets.”

Least attractive

The proportion of respondents citing the US as the least attractive destination for investments doubled to 18% in May from a month ago, Bank of America’s survey found.

Investors prefer Europe, saying their stocks are undervalued, according to the survey. The S&P 500 is trading at 16 times estimated profits, compared with the multiple of 15 for the Stoxx Europe 600 Index, data compiled by Bloomberg show.

Besides lower valuations, European stocks get more support from the central bank, according to Hayes Miller, the Boston-based head of multi-asset allocation in North America at Baring Asset Management Inc. While the Federal Reserve has cut its economic stimulus for a third time in a row this year, the European Central Bank may increase monetary easing, he said.

The ECB “is likely to be looser for longer, and that’s going to help drive earnings growth profiles to positive surprises going forward,” Miller said by phone on 15 May. His firm oversees about $57 billion and favours Europe over the US. “We don’t have much to go on” in the US, he said.

Equity ETFs

Investors pulled $7.7 billion out of US equity ETFs in the first half of May, data compiled by Bloomberg show. They withdrew almost $2 billion from mutual funds during the week through 7 May, according to an estimate by ICI. In the previous three months, deposits totalled $35 billion.

Reversals like this preceded stock gains nine out of the 12 times since 2000, data compiled by Bloomberg show. The last time fund flows turned negative in January, the S&P 500 advanced 5% over the next two months.

Individuals weren’t convinced that stocks are safe to buy until the S&P 500 more than doubled from its 2009 low. They added more than $150 billion to equities in 2013, after withdrawing $260 billion in the previous four years, data compiled by ICI and Bloomberg show. With their return, the S&P 500 jumped 30%, the most since 1997.

Today’s bearish investors are tomorrow’s bulls, according to Chris Bouffard, chief investment officer at the Mutual Fund Store in Overland Park, Kansas. Sentiment will improve once the economy rebounds from a weather-related slowdown, he said.

US Economy

US gross domestic product grew 0.1% in the first quarter for the lowest pace in a year as severe winter weather hurt housing to retail sales. The economy will expand 2.5% this year and accelerate to 3.1% in 2015, according to the median of 94 economists’ estimates in a Bloomberg survey.

“There is a solid foundation for an advancing market,” Bouffard said by phone on 15 May. His firm oversees $9 billion. “We certainly see that cautious stance among pockets of our clients. It’s not because there is any impending sense of doom. It’s people taking money off the table and playing defensive. There is some inherent buying power.” Bloomberg