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Wall Street Gurus Scale Back on Stocks

Tuesday, 11 October 2011 05:54 PM

Clients of some big Wall Street firms have probably missed out on sharp increases in stocks over the last few days. Firms that were cautiously optimistic or bullish through the summer selloff have turned bearish just as the market seems to be clawing back.

Between Sept. 18 and Oct. 6, several Wall Street firms that mostly stood pat through months of market volatility finally decided enough is enough.

Morgan Stanley Smith Barney, Wells Fargo Advisors and UBS have scaled back their portfolios' exposure to equities in the past three-and-a-half weeks, shifting away from more unpredictable stocks and into the safety of fixed income and cash.

Meanwhile, the S&P 500 Index had its biggest rally in nearly six weeks on Monday.

But that hasn't swayed investment officers at the firms. They don't believe governments in Europe and the U.S. are doing enough to address the crushing debt threatening their financial systems.

Investment managers said they believe the ongoing uncertainty and wild market swings caused by the expanding euro zone debt crisis and a U.S. debt downgrade are here to stay. What's more, the volatility suggests to some investment gurus that another recession is increasingly likely.

European leaders have been meeting for months to address the debt crisis plaguing the continent. What little progress there has been is not happening fast enough, said Jeff Applegate, chief investment officer at Morgan Stanley Smith Barney, the brokerage arm of Morgan Stanley .

European Central Bank president Jean-Claude Trichet warned Tuesday that the crisis had "reached a systemic dimension."

At the same time, in the U.S. the government has been unable to get much accomplished, Applegate said. For example, it's been weeks since President Obama submitted his fiscal stimulus package, and there hasn't been any action in Congress.

"You have seen a lot of change since August," Applegate said. "And the policy responses have not been been swift enough or large enough."

On Oct. 6, MSSB shifted the allocation of its portfolios from overweight on global equities, commodities and REITs to underweight and from underweight on global cash to overweight. The firm also shifted its allocation on global bonds from underweight to overweight.

"This is a big shift for us, the biggest we have made since April 2009," Applegate said. At that time MSSB shifted to overweight equities as the markets rebounded after the financial crisis.

One major factor in MSSB's decision to cut back on risk was a Sept. 21 report by the Economic Cycle Research Institute predicting a recession. ECRI has successfully predicted the last four U.S. recessions.

On Oct. 1, Wells Fargo Advisors, the brokerage arm of Wells Fargo & Co. went from neutral to underweight on its equity exposure in its cyclical asset allocation portfolios.

Wells, which reevaluates its portfolios on a quarterly basis, first reduced its equity exposure slightly in April, but cut exposure even further this month due to fears about the European debt crisis, said Stuart Freeman, chief equity strategist at Wells Fargo Advisors.

The firm in April shifted its moderate growth & income portfolio to 58 percent in equities from 63 percent. This month, the fund decreased its share of equities again, to 45 percent.

Wells Fargo Advisors now predicts a 35 percent chance for a U.S. recession, up from a 20 percent chance four months ago, Freeman said. The chances of a recession in Europe, according to the firm: 40 percent, up from 25 percent a few months ago.

Similarly, UBS shifted its portfolios from neutral to underweight equities on Sept. 18.

"We felt that the fundamental issues affecting the markets had not been resolved," said Mike Ryan, head of research for wealth management at UBS. Ryan doesn't think the United States is necessarily headed for a recession.

"We think you will see choppy, sluggish growth," he said.

Of course, not every firm is scaling back on equities. Equity strategists at Bank of America Merrill Lynch -- whose well-known logo is a bull -- are maintaining their overweight position on equities, albeit a "moderate" overweight position, said Kate Moore, global equity strategist at Bank of America Merrill Lynch.

She said that too many investors have held too small a position in equities since the market crash of 2008 and missed the rally. She believes Europe is closer to coming up with a solution for its problems.

"We are seeing a willingness of policy makers in Europe to put things together," she said.

Bank of America Merrill Lynch's economists forecast U.S. GDP growth of 2.5 percent for the third quarter, she said.

"That's a far cry from the two quarters of negative GDP growth that define a recession," Moore said.

© 2019 Thomson/Reuters. All rights reserved.

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Clients of some big Wall Street firms have probably missed out on sharp increases in stocks over the last few days. Firms that were cautiously optimistic or bullish through the summer selloff have turned bearish just as the market seems to be clawing back. Between Sept. 18...
Tuesday, 11 October 2011 05:54 PM
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