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 With the iPhone maker among just a handful of companies accounting
for more than half of the U.S. stock market's gains this year, some
fund managers and analysts are concerned that the long bull market,
which has pushed the S&P 500 index <.SPX> up almost 50 percent in
less than three years, is starting to wane.
They worry, among other things, that the stock market crash in China
will cut into global growth; that a stronger dollar will erode into
overseas profits for U.S. companies; and that companies are trading
at rich valuations after four years in which the S&P 500 hasn't
experienced a 10 percent decline - known as a correction on Wall
Street.
Now, with lackluster earnings results in tech companies, one of the
market's few bright spots this year, investors are concerned that a
decline in shares of Apple, Microsoft Corp, and IBM Corp <IBM.N>
might foretell a wider pullback.
"The market is flashing a yellow light right now," said Bob Doll, a
senior portfolio manager at Nuveen Asset Management.
NARROWING MARKET
The S&P 500 is currently less than a percentage point away from an
all-time closing record. But market internals - indicators
professionals look at to determine the health of the market - look
weak.
Fewer stocks are leading the rally while more are hitting their
lowest prices in a year, Thomson Reuters data show. For the year
through July 17, just five companies – Apple, Amazon.com Inc, Google
Inc, Walt Disney Co, and Facebook Inc – accounted for 61 percent of
the year to date gain in the S&P 500, according to Howard
Silverblatt, senior index analyst at S&P Dow Jones Indices.
The spread between daily gainers and losers on the New York Stock
Exchange on a 50-day average rolling basis has favored decliners
since June 9, and earlier this month became more skewed in favor of
those falling than at any time since mid-2012.
Back then, amid fears of a global slowdown and a crisis among
Spanish banks, the S&P 500 went through a 9.9 percent decline over
two months. The recent pullback on the S&P, however, has been less
than 4 percent.
A look at stocks hitting yearly highs and lows similarly offers
little comfort. There are more NYSE stocks hitting 52-week lows than
highs on a 50-day moving average than since December 2011 after
worries about the euro zone's deepening debt crisis brought the S&P
500 down 9.8 percent between October and November.
The declines, though close to 10 percent, do not fit the traditional
definition of a correction. The red flags that go up when the market
hits that number sometimes ignite herd selling.
The weakening internals look to some to be similar to late 1999 and
2007, both periods that preceded bear markets, when index averages
motored higher even though fewer stocks were being carried along
with the rest of the market.
The widening gap between top-performing stocks and the rest of the
market comes at a time when earnings in the S&P 500 are expected to
fall 1.9 percent compared to the same quarter last year. Verizon
Communications Inc <VZ.N>, for instance, lowered its full-year
revenue target on Tuesday, while United Technologies Corp <UTX.N>
cut its 2015 profit forecast for the third time this year due in
part to dimming views on new equipment sales in China.
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As the bull market's gains narrow to fewer companies, fund managers
are piling into the shares of those that are able to show growth.
About 71 percent of actively managed large-cap funds currently hold
Apple, for instance, making it one of the most widely-held stocks on
Wall Street.
At the same time, rich valuations are making it harder to add new
companies to his portfolio, said Lamar Villere, one of the
co-managers of the $745 million Villere Balanced fund. The fund has
added just two new companies this year, compared to a typical six in
a given year, he said.
"In a market like this where things are fully valued, we are
watching for some temporary thing to happen to spook other investors
and give us an opportunity to buy," he said.
Buying market pullbacks has been a winning - and crowded - strategy,
with the largest decline so far this year a near 5 percent slip in
January.
"This 'buying the dip' mentality has been so successful in the last
several years, I wonder if we've got to wash that out," said Jim
Paulsen, who helps manage about $350 billion as chief investment
officer at Wells Capital Management in Minneapolis.
"Maybe we go down 5 to 7 percent, people buy the dip and then it
goes down another 5 percent and washes that out finally. I wouldn't
be surprised if we get a 10-to-15 percent correction."
To be sure, there are still pockets of the U.S. stock market that
look attractive. Connor Browne, one of the $1 billion Thornburg
Value fund, said that his fund has been trimming its position in
high-flying stocks such as Netflix Inc and moving more money into
small and mid-cap companies that are less exposed to currency
fluctuations or China.
The Russell 2000, which is made up primarily of smaller companies,
is up 4.5 percent for the year, compared with the 2.7 percent gain
among the large companies in the S&P 500.
Brian Jacobsen, chief portfolio strategist for Wells Fargo funds,
said that high valuations, rather than a slowing domestic economy or
signs of a bubble, are pinning in further gains in the U.S. market.
The S&P 500 now trades at a trailing price to earnings ratio of
19.5, according to Thomson Reuters data, at the high end of its
historical average.
Jacobsen now favors European stocks, which are cheaper and have
better growth prospects in the year ahead, he said. Yet until he
sees new orders for durable goods declining materially or credit
spreads start to tighten, he's content to keep his holdings in U.S.
stocks without moving to cash.
"Unless the market takes a big jump here without any increase in
earnings or revenue, then I'm leaving my money on the table," he
said.
(Reporting by David Randall. Editing by David Gaffen and John
Pickering)
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