Main Street and Wall Street are moving in opposite directions.
Individual investors are plowing money back into the U.S. stock market just as professional strategists say gains for this year are over. About $100 billion has been added to equity mutual funds and exchange-traded funds in the past year, 10 times more than the previous 12 months, according to data compiled by Bloomberg and the Investment Company Institute.
The growing optimism contrasts with forecasters from UBS AG to HSBC Holdings Plc, who say the stock market will be stagnant with valuations at a four-year high. While the strategists have a mixed record of being right, history shows the bull market has already lasted longer than average and individuals tend to pile in at the end of the rally.
“If Wall Street, after poring over all known data, comes up with a target and we’re already there, and you still see individual investors buying and they’re typically the ones that are late to the party, it would seem there is limited upside,” Terry Morris, a senior equity manager who helps oversee about $2.8 billion at Wyomissing, Pennsylvania-based National Penn Investors Trust Co., said in a July 8 phone interview.
U.S. stocks slid from record highs last week, sending the Standard & Poor’s 500 Index to the biggest drop since April, amid concern over financial stress in Europe and the timing of higher U.S. interest rates. The Chicago Board Options Exchange Volatility Index jumped 17 percent from a seven-year low.
The S&P 500 rose 0.5 percent to 1,977.10 at 4 p.m. in New York as Citigroup Inc. rallied on better-than-forecast earnings. The benchmark gauge is up 7 percent for 2014, compared with a 3.5 percent advance in the Bloomberg Commodity Index of 22 raw materials and 3.3 percent gain for the Bloomberg U.S. Treasury Bond Index.
For most of this year, equity investors have seen little volatility and steady gains, giving them confidence to put money back into the market. Individuals deposited about $9.5 billion in June to stock funds and have added cash in eight of the past 10 months, data compiled by ICI and Bloomberg show. That’s a reversal from the five years through 2012, when $300 billion was withdrawn.
Professional investors, such as Nick Skiming of Ashburton Ltd., say that individuals investors are attracted to stocks after seeing others getting rich from a big rally, a time when equities are usually overpriced. The bursting of the technology bubble in March 2000 was marked by mutual funds absorbing a record $102 billion in the first quarter.
“As institutional investors, we’re always concerned when the retail investor is actually arriving in the market,” Skiming, who helps manage $10 billion at Ashburton, said by telephone from Jersey, the Channel Islands. “The retail investor arrives when they can only see blue skies.”
For Laszlo Birinyi of Birinyi Associates Inc., stocks have entered what he calls the exuberance phase, the last of four stages usually seen in bull markets. He still sees more gains to come, citing the skepticism on Wall Street as a sign that plenty of investors haven’t bought shares yet.
The track record of equity strategists as a whole shows the difficulty in predicting stock prices. About half of the time, the S&P 500 ended the year more than 10 percent away from the average level predicted by strategists in January, according to data compiled by Bloomberg since 1999.
Birinyi expects the S&P 500 to keep advancing as bears capitulate and pick up stocks.
“This is a durable and sustainable bull market,” he said in a July 9 phone interview from Westport, Connecticut. “It’s going to surprise us because I still don’t think we’ve got to a point where water is boiling yet.”
Birinyi, one of the first analysts to advise clients to buy when stocks were bottoming after the 2008 financial crisis, predicts the S&P 500 will rise to 2,100 by December.
Goldman Sachs Group Inc. raised its S&P 500 forecast today to 2,050 from 1,900. Rising earnings and faster economic growth will push equities higher and stocks are still attractive to bonds, according to a research report from David Kostin, chief equity U.S strategist at the bank.
Wall Street strategists are more cautious with forecasts implying the S&P 500 will rise 0.5 percent by year-end to 1,986, the average from a Bloomberg survey of 19 investment firms.
The end of economic stimulus from the Federal Reserve will lead to more stock-market volatility and lower returns, according to Julian Emanuel, a U.S. equity and derivatives strategist with UBS in New York. Minutes released last week from the Fed meeting in June showed officials agreed they’ll end their asset-purchase program in October if the economy holds up.
“When you’re making a transition away from the Fed being the primary driver to corporate profits and a growing economy, it’s more muted returns,” Emanuel said by phone on July 10. “Stocks will pause or set back a little.”
Relatively expensive valuations will also limit future gains, according to Garry Evans, HSBC’s global head of equity strategy in Hong Kong. He said in a report last week that the S&P 500 will finish the year at 2,000, a 1.6 percent gain from last week’s close. The index trades at 16.6 times projected earnings, near the highest level in four years, data compiled by Bloomberg show.
Investors will get more clues about the health of the economy during the next two weeks with more than 200 companies in the S&P 500 releasing quarterly results. Profit probably rose 4.5 percent in the three months through June, analyst estimates compiled by Bloomberg show.
The bull market, which has almost tripled the S&P 500’s value since 2009, is closer to the end than the beginning, said Walter Todd, who oversees about $980 million as chief investment officer at Greenwood Capital Associates LLC. The rally has lasted 64 months, about a year longer than average, according to data since 1962 compiled by Birinyi and Bloomberg.
“To the extent that investors start to put a lot of money into the market, it would certainly be late,” Todd said in a July 9 phone interview from Greenwood, South Carolina. “But to say that the end is going to happen in the next few months, I don’t agree with that.”