As the S&P 500 reached new records this week, you might be tempted to ask: How high can the market go?
You might even be thinking of paring back your equity exposure in anticipation that the 10-year bull market might finally be coming to an end. However financial experts warn: not so fast.
That doesn’t mean there are not plenty of risks. A message from investment bank UBS to investors right now is caution, the firm said in research published this week.
The cautionary stance comes from a lack of clarity in terms of what catalysts, if any, could drive the markets higher, according to Michael Crook, head of Americas investment strategy at UBS Global Wealth Management.
It’s also a recognition that performance has been good so far this year. The S&P 500 hit a record 3,047.87 before closing down 0.1% at 3,036.89 on Tuesday. Year to date, the index is up by more than 21%.
“We’re not suggesting investors should be dumping equity investments by any means,” Crook said.
Financial advisor Paul Pagnato, CEO and founder of PagnatoKarp in Reston, Virginia, said investors are asking if they should take some risk off the table in light of the recent run up.
“We’re advising them to stay the course,” Pagnato said.
Indicators to watch
The good news is that UBS doesn’t see negative returns or a recession on the horizon. But the firm is projecting low single-digit returns for stocks over the next six to 12 months, Crook said.
Among the forces that could be a drag on stocks: ongoing trade negotiations between the U.S. and China, slow economic growth and interest rate cuts by the Federal Reserve, according to UBS.
“There could be more downside risk, particularly if the trade negotiations start to go sideways,” Crook said.
However, Pagnato said he remains optimistic, based on a checklist of data points he is watching for signs we are going from a bull market to a recession.
Evidence of a downturn — such as rising interest rates, negative company earnings or stocks failing to reach new highs, to name a few examples — is nonexistent, he said.
What’s more, the yield curve inversion might not be the bad omen for a recession or downturn that many fear, he said. An inverted yield curve is when short-term U.S. Treasury bond investments pay more than longer-term investments.
“You go back to the late 1800s to see a period of time when you had an inverted yield curve, and the economy flourished and the equity markets flourished,” Pagnato said. “I view that as a similar period that we’re in now.”
Moves to make
For now, most investors want to stick to the same strategy.
However, there are two scenarios when it might make sense to take some risk off the table or adjust your portfolio.
First, it depends on where you are in your life, according to Crook.
If you’re close to retirement, you probably want to pare back your equity exposure, he said. That’s because one of the biggest risks retirees face is that their equity returns will turn negative at the start of retirement.
“There is certainly a reasonable case to be made that they should take some of their equity risk off the table … to make sure that the downside doesn’t disrupt their retirement plan significantly,” Crook said.
But if you’re 35 and the market declines by 25%, that shouldn’t affect your retirement investing strategy at all, he said.
Another case where you might want to adjust your portfolio is to rebalance to make sure you’re still at your target allocations, Pagnato said.
That’s because a 70% equity allocation could have drifted up to 80% over the last 12 months to 24 months, for example.
“I do think it’s important for investors to rebalance back to their targets,” Pagnato said.