Confidence Remains in an Aging Bull Market

Both for novice individuals and sophisticated institutions, investor perceptions of preparedness for market turbulence can often differ from actual readiness.

New survey data shared by Wilshire Associates suggests institutional investors are broadly feeling self-assured when it comes to navigating the next bout of market volatility.

According to Wilshire Associates, the vast majority (95%) of 75 institutional investors recently surveyed reported being “at least somewhat confident” in their organization’s readiness to successfully navigate market volatility.

Importantly, among that group, 39% feel very confident and 56% are only somewhat confident. The remaining 5% do not feel very confident.

Wilshire’s analysis shows less than one-third of respondents (29%) feel “far more prepared” for a bear market today than their organization was in 2007, ahead of the Great Recession. More than half of institutions (58%) feel more prepared than in 2007, the data shows, while the remainder (13%) reported feeling the same level of preparedness as 12 years ago.

As Steve Foresti, chief investment officer of Wilshire Consulting, observes, investor perceptions of preparedness for market turbulence can often differ from actual readiness. This matches the take given recently by Northern Trust CIO Bob Browne, who warns that many institutional investors would benefit from taking a step back and reassessing their risk and return objectives following a long streak of essentially uninterrupted gains.

According to the Wilshire data, institutions have mixed views when it comes to what type of investments will generate best market returns in the next 12 months. Investors will primarily look to equities, the survey data suggests, with 41% of respondents citing U.S. or emerging market equities to bring about the greatest market return over the next year.

Fixed income was the next-most highly cited investment opportunity, with 29% of respondents choosing international and U.S. fixed income as creating the greatest opportunity. One-fifth believe alternatives will generate best market returns and 10% will look to real estate, according to the Wilshire data.

“While it is nearly impossible to predict what might trigger a sustained market correction, institutions can make sure their portfolios are well diversified to account for various risks and market scenarios,” says Foresti. “Running portfolio stress tests can be a valuable technique to pre-experience an institution’s preparedness.”

Market insights in equities and fixed income

Related market commentary was shared this week by Charles Schwab Investment Management’s Omar Aguilar, CIO of equities, and Brett Wander, CIO of fixed income.

On Aguilar’s assessment, the 2019 market rally has primarily been driven by accommodative major central bank policies, along with better-than-expected first quarter earnings. Aguilar says the odds for a rate cut by the Fed in 2019 have been rising, while the European Central Bank has continued to expand its balance sheet in an effort to stabilize growth.

“In spite of a solid labor market and stable U.S. economy, inflation has been below the Fed’s target for over a decade,” Aguilar points out. “Benign wage growth, demographics, trade disputes, reduced demand for goods, and corporate unwillingness to pass along higher labor costs to consumers are headwinds for domestic inflation. Overseas, inflation also remains low. Meanwhile, China is employing a variety of tools to stimulate growth, with its fiscal policies a potential positive for emerging markets.”

Aguilar says one obvious source of uncertain is and will remain the trade tension between the U.S. and China.

According to Wander, on the fixed-income side, there is no great mystery that President Trump wants a rate cut.

“Donald Trump has been tweeting intensely about the benefits of an interest rate cut, which he’s been trying to push Fed Chair Jerome Powell toward for several months,” Wander explains. “It’s not unheard of for a President to try and pressure the Fed to keep rates low. The hope is that this would spur economic growth and provide political benefits. What is new is the social media venue. Will this approach prompt a rate cut? And if so, who would win, and who would lose?”

Wander says there would be clear winners and losers in this scenario.  

“The stock market typically sells off in response to a rate cut, which implies that the economy is on the decline. However, presidential pressure and low inflation could prompt a preemptive cut now. This could be a positive for equities and fixed income as the additional stimulus might further extend the longest economic expansion in U.S. history,” Wander says.

Rate cut losers would include, in Wander’s estimation, long-term savers and retirees, “who are first in line to take a hit when the Fed cuts rates.”

“After finally reaching a yield level close to the rate of inflation on their T-bills, CDs, and money market accounts, savers could become quite frustrated if their yields decline in response to a rate cut,” Wander explains. “We feel that investors should, therefore, be aware of their portfolio exposures and be willing to adjust them as the economic outlook shifts.”