Investors Face a ‘Big Call,’ Warns Bank of America

The aging bull market is forcing investors to choose whether to sell risk assets — or hold on for more gains.

(Bigstock photo)

(Bigstock photo)

The record run of the U.S. stocks has set the stage for fund managers to decide whether to sit out potential gains in favor of a more defensive portfolio in an aging bull market.

While the Standard & Poor’s 500 index rose this month to an all-time high in a record-long bull market for U.S. stocks, other assets including emerging market equities, copper, and European banks struggled in bear territory, according to a Bank of America Merrill Lynch research report Friday.

“There has been a huge divergence in performance of risk assets in recent months,” Bank of America Merrill Lynch strategists James Barty, Ronan Carr, and Jack Iacovou wrote in the report. “It is getting stretched now.”

The outperformance of stocks in the U.S. is likely more marked than usual because of the country’s robust economy and strong corporate earnings, the strategists said. Still, the “big call” for investors is determining how close the market is to ending its cycle and deciding whether it’s time to buy riskier assets on the expectation of strong global growth — or sell them as they rally.

In its survey of fund managers, Bank of America Merrill Lynch has seen a distinct rise since January in the percentage indicating the market is “late cycle.” Around 80 percent now view the bull market at that stage, according to the report.

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The bull market for U.S. stock has stretched for more than nine years, with the S&P 500 closing at a record 2,914 on August 29. The index has returned a total of almost 10 percent this year through August 30.

“Our economists remain optimistic on global growth for 2018/19, but the big risk is China,” the strategists said. “Chinese growth was already softening before the trade problems began.”

Trade tensions between the U.S. and China escalated this year as each country hit the other with tariffs on billions of dollars of imported goods. Barty, Carr, and Iacovou said they believed a “full-blown trade war will be avoided,” but that the situation could get worse before it gets better.

Assuming global growth continues, the strategists said struggling risk assets like emerging market equities should recover their losses. They noted that the MSCI ACWI index, which tracks the performance of large and mid-cap equities across developed and emerging markets, is up 4 percent this year.

“A good part of this is driven by the U.S. but other risk assets should now play catch-up if global growth holds up,” they wrote.