Stock and bond markets are signalling two disparate futures. Soaring stock markets suggest traders think a recovery is at hand. More genteel bond markets suggest traders assume the coming recovery will be more restrained. In a report released this week wealth managers at Merrill Lynch suggest prudence and are trimming the equity portion of suggested portfolios.
"Since we raised our allocation to equities last summer, stock prices are measurably higher, valuations are less attractive and some degree of complacency has set in," the Merrill wealth management strategists say. "We still prefer stocks over bonds, but with tempered enthusiasm and a narrower opportunity set."
Many analysts have suggested markets are due for a 10% correction in the S&P 500. In preparation for a dip ML analysts recommend clients trim stock holdings and put the money in cash. ML is raising its cash allocation an average of 2% across risk-weighted portfolios. Conservative clients are recommended to take cash levels to 24% from 23%. The most aggressive clients should move their cash holdings to 3% from 1%.
The analysts are not bearish, however. According to the strategists the conditions that defined the market in 2008 are not present today. "We do not see the leverage in the economy that was present before the financial crisis. Nor do we see signs of speculation within the stock market... The best performing groups in 2014 are a broad mix of industries -- airlines, utilities, real estate, oil services and electronics. These are very unlike the high beta biotechnology and internet stocks that led in 2013, many of which corrected sharply in 1Q.”
In fact, the analysts say that fund managers are raising their cash holdings is a "buy" signal.