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Stock Paralysis Eases at Right Time for Bulls Hoarding Cash

Stock Paralysis Eases at Right Time for Bulls Hoarding Cash

(Dollar Photo Club)

Monday, 31 October 2016 12:43 PM

Stocks are stuck in the worst rut since 2006 and active funds are hemorrhaging assets. Yet signs of a thaw are gathering.

Among them is a data that show lockstep moves in stocks are loosening, a welcome sign to fund managers whose efforts to pick winners have been thwarted for years as shares swung in unison. Equity correlations have eased to a three-year low on U.S. exchanges, aided by a rally in economically sensitive banks and software makers and a selloff in defensive industries.

To bulls, a stock market that is suddenly making distinctions between winners and losers is just the thing to draw in cash that by some measures is the highest in 15 years among investment funds. Money will be unleashed after the presidential race is decided, they say, with managers eager to keep momentum up after their best quarter of the bull market.

“Holding extra cash in case of a surprise seems more prudent to a lot of managers,” Michael Ball, president and lead portfolio manager of Colorado-based Weatherstone Capital Management Inc., which oversees about $500 million. “Once that’s done, they’re likely to go back to their favorite companies and sectors. That will be the primary focus as they try to make gains going into year-end.”

The reputation of stock-picking managers has taken a beating in 2016, capped by news Friday that seven top asset managers reported a total of $50 billion in quarterly withdrawals, most of it from active funds. A measure of redemption may be possible in the months after the election, a period when the S&P 500 has risen an average of 0.6 percent. The benchmark index rose 0.2 percent to 2,129.74 at 9:39 a.m. in New York.

Between the presidential politics, interest-rate handicapping by Federal Reserve officials and earnings season, no signal has been strong enough to jar U.S. stocks out of their tightest trading range in a decade. Over the period since July 8, the S&P 500 Index has swung back and fourth within a 64-point range, at one point alternating between gains and losses for nine straight days.

But while the benchmark gauge churns, stocks within it have gotten more lively. A measure of 30-day realized correlation among S&P 500 constituents has eased 34 percent since reaching a four-year high in October 2015, according to data compiled by Bloomberg.

Active managers have reaped benefits. According to Bank of America Corp., the proportion of large-cap funds beating their benchmarks reached 58 percent in the third quarter, compared with 18 percent in first six months. That marked the best period since the second quarter of 2015, and the second-best since the start of 2009.

Among growth funds, 71 percent exceeded returns on the Russell 1000 Growth Index, while 63 percent of value investors beat their benchmark. It was the most since 2013 for both groups.

“We’re already seeing more stock-picking,” Peter Jankovskis, who helps oversee $1.9 billion as co-chief investment officer of Lisle, Illinois-based Oakbrook Investments, said by phone. “Right now, people aren’t foreseeing upsetting macro events, which are often what cause high correlation within stocks. People are feeling free to look at stocks on an individual basis, rather than investing based on broad economic or style factors.”

The improvement has come at a time when equity bullishness among individuals is in short supply. Almost $100 billion has been yanked from mutual and exchange-traded funds tracking U.S. stocks since January, an almost unprecedented rate. Perhaps reflecting the possibility of more withdrawals, cash balances at money managers are the highest since 2001.

Fund managers are currently holding 5.8 percent of their portfolios in cash, the most since the period after the Sept. 11, 2001, terrorist attacks, according to a survey conducted by Bank of America Corp. The level was matched in July after the U.K. voted to leave the European Union.

“After we get through the election, there will be less uncertainty, which lends confidence to investors who at that point will be seeking returns after some time on the sideline,” Richard Sichel, chief investment officer at Philadelphia Trust Co., which oversees $2 billion, said by phone. “Having cash out there can definitely be positive for the market.”

An S&P 500 rally would match Wall Street expectations. The median forecast of 19 strategists sees the index finishing 2016 at 2,175, a 2.2 percent gain from Friday’s close. The most bullish forecaster is Thomas Lee of Fundstrat Global Advisors, who foresees the S&P 500 ending the year at 2,325, an 9.3 percent climb from current levels.

That optimism doesn’t extend to David Kostin of Goldman Sachs Group Inc., who forecasts that the benchmark will end 2016 down 6 percent at 2,000. The forward price-earnings ratio for the S&P 500 has risen by about 70 percent since late 2011, meaning valuations are unlikely to expand much further, he wrote in a Oct. 24 note.

Based on current odds, the U.S. could be headed for an election in which one party wins the White House while also gaining at least one Senate seat and 20 House seats, according to Kostin. That’s happened six times since 1932, after which the S&P 500 fell by 2 percent in the following month, and 4 percent over three months, he said.

Such an outcome raises equity risks because it “means less gridlock but more policy uncertainty from new legislation,” he wrote in an Oct. 26 client note.

With the election less than two weeks away and Hillary Clinton clinging to strong odds of victory, calm had been creeping into global markets as everything from stocks to commodities shows subdued volatility. Bank of America Merrill Lynch’s GFSI Market Risk Index, a measure of future price swings implied by options trading on global equities, interest rates, currencies and commodities, fell to the lowest since December 2014.

Equities got a jolt Friday after the FBI discovered e-mails that may pertain to its investigation of Clinton. While, the S&P 500 tumbled 40 points within 40 minutes of the announcement, futures on the index traded little changed Sunday evening.

“The markets are probably too complacent, because there is the chance of a surprising election result,” Jankovskis said in a phone interview before the FBI statement. “But if it election comes in as most people are expecting, we’re still ripe with potential for a rally anywhere from the end of Thanksgiving through the Fed meeting in December.”


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Stocks are stuck in the worst rut since 2006 and active funds are hemorrhaging assets. Yet signs of a thaw are gathering.Among them is a data that show lockstep moves in stocks are loosening, a welcome sign to fund managers whose efforts to pick winners have been thwarted.
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Monday, 31 October 2016 12:43 PM
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