One has to wonder if some investors are even watching the markets and rising trade tensions between the U.S. and China. Because clearly, many remain upbeat on stocks (at still high relative valuations) despite all the increasingly negative news swirling around this month.
That puts scores of investors at risk of being caught flat-footed if market volatility returns as many on Wall Street believe will happen this summer. In turn, the market could see some big down days as over-optimistic investors sell and head for the exits.
“I think the market has underestimated [the trade war] to date, but it’s starting to put those estimations into the picture,” Charles Schwab chief fixed income strategist Kathy Jones said on Yahoo Finance’s The First Trade.
“I do worry about investors taking on too much risk [in the search for yield]. Because if things turn around, they are going to be caught and not realize the risks they are taking,” Jones added. “We are kind of at a tricky point here.”
To be sure, complacency abounds right now.
Despite the S&P 500 dropping 1.2% last week, Bank of America Merrill Lynch says in new data out Wednesday its clients continued to buy stocks amidst the pullback. Hedge funds stayed among the most cheerful on the market, buying stocks for the second straight week. Retail and institutional buyers wised up a bit as the macroeconomic data soured and retailers like Kohl’s (KSS) disappointed on first quarter earnings — each group were net sellers of stocks.
BofA says its clients bought stocks in six of the 11 sectors last week. Cyclical sectors (or among the most exposed to the trade war’s impact) continued to see strong inflows. All three client groups, BofA said, bought stocks in the economically sensitive energy, materials and commercial services sectors.
Many sources Yahoo Finance have talked with have stayed upbeat that stocks can regain their record highs hit in 2019. But, in the same breath they have acknowledged selling into rallies in the market given the likely return of volatility. Indeed that’s one of the clearest signs yet that even the bulls are getting a little worried of being too over-levered on equities.
That increased cautiousness is probably the correct course of action.
The latest reads on durable goods and PMI manufacturing were surprising letdowns. The yield curve inverted again on May 23 and since then, fears of recession have returned to Wall Street. Earnings calls from big name retailers have shed light on the impact to profits from the trade war.
As a result, key areas in the market such as the Dow Transportation Average (^DJT) and Russell 2000 (^RUT) have started to break down. The S&P 500 (^GSPC) fell below the psychologically important 2,800 level today, which could pave the way for more sizable downside says Miller Tabak strategist Matt Maley.
“Currently we are seeing markets provide investors a gut check and the bad news centers around tariffs and global growth,” SunTrust Chief Markets Strategist Keith Lerner tells Yahoo Finance.
The upside at the moment? Don’t expect a recession just yet amid a still solid U.S. labor market and low inflation. “Recession is a 2020 event. I wouldn’t bet on a recession this year,” Jones said.
Brian Sozzi is an editor-at-large and co-host of ‘The First Trade’ at Yahoo Finance. Follow Brian Sozzi him on Twitter @BrianSozzi
Read the latest financial and business news from Yahoo Finance
Apple stock could jump by as much as 530%, despite Trump's trade war on China
Uber's stock may be in reverse, some think it may have bottomed
Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, SmartNews, LinkedIn, YouTube, and reddit.
