This grim outlook for US stocks, the most pessimistic since June last year, contrasts sharply with asset managers’ seemingly ever-lasting confidence in European and Japanese equities. Though they are slightly less optimistic about these asset classes than a couple of months ago, there is a firm believe that a US equity market slump will not spread quickly to other markets.
Though US equities have been in a bull market for much of the past seven years, the last time the S&P 500 index lost more than 5% of its value is not very long ago. To be precise: it happened during the 12 months until February 2016.
Admittedly, asset managers are not always a reliable gauge when it comes to future return expectations, but we’ll have to give them some credit this time. In January 2015, most of them believed the US equity outlook was sunny, but their 12 month-outlook turned negative quickly in the next couple of months. So even though they didn’t get their timing perfectly right, they could make a claim they had seen a market correction coming.
Is it all about the Fed?
Fund buyers are equally unimpressed by US equities, and they have been considerably more consistent in this than their asset management counterparts. For more than 18 months, those planning to decrease their allocation have outnumbered those intending to increase it in almost all European countries. European equities, on the other hand, continue to be broadly popular.
So what does this discrepancy boil down to? Of course, valuations in the US are noticeably higher than in Europe, and this is the reason mentioned most often by your peers when asked why they are underweight US equities.
But the most important driver of equity market returns in the past few years has been central bank policies. And prospective monetary policy tightening by the Fed, as the US labour market continues to pick up steam, is making investors nervous. As my colleague Alex Sebastian noted earlier this week, investors tend to be more unsure about their weighting to US equities (and fixed income) right after a Fed meeting than before it. However, investors can know one thing for sure: the start of a Fed rate hiking cycle often is a prelude to a bear market.
Click here to see a full overview of the latest results from Expert Investor Investor Fund Manager Sentiment Survey, created in association with Old Mutual Wealth.