This week, both the S&P 500 Index and the Dow Jones Industrial Average hit their highest levels since the summer of 2008. Nasdaq hit a personal best since summer 2007. The FTSE 100 and the Hang Seng indexes are also at or near multi-year highs.
This energized market is reflected in various sentiment surveys from investors and advisors alike. The BofA/Merrill Lynch Survey of Fund Managers for January, for example, shows that 55% of asset allocators plan to overweight global equities. This enthusiasm is the highest level since July 2007, so it seems to be in lockstep with market performance. Moreover, it represents a major jump in just one month. In December, a net 40% was overweight global equities.
And this mirrors the optimism from advisors, according to our online poll here at On Wall Street. We recently asked which asset class they plan to overweight this year, with seven choices. And the overwhelming conclusion was that they plan to overweight some of the riskier assets in clients’ portfolios, particularly global equities. Specifically, 30% of those who answered said they plan to overweight the U.S. and other developed market equities; commodities came in second, at 18%. But the real sign of enthusiasm comes from the fact that the last two options for overweighting were the safest investment choices in the poll question: cash and short-term bonds came in sixth at 10%, and investment-grade bonds came in last with just 3%.
Just one more indication of general rising optimism: In the most recent American Association of Individual Investors Sentiment Survey, 52.3% of participants feel bullish about the direction of the stock market over the next six months. (This is actually a 3.5% drop from the previous survey, but still well over the 39% long-term average.)
o, people are optimistic about equities. Most of this enthusiasm stems from a brighter outlook for the global economy. If this is your feeling, it’s certainly easy enough to gain exposure to equities via index funds or ETFs. But before you and your clients gorge on stocks, bear in mind two caveats. Surveys, by nature, take measures in broad brushstrokes. The conclusions are averages, not fine-grain analysis. That is, just because 70% of investors are excited about taking on more risk, that doesn’t mean that the couple sitting across from you is in that group. They may well have their own reasons for wanting to add more safety to their portfolio. And secondly, even if they do want to add more risky assets, make sure they’re not getting swept away by the so-called January Effect.
Whether or not there is anything to the idea that stocks, and especially small-cap stocks, get an extra pop in January is an open debate, but don’t let clients get swept away by popular sentiment with no real underlying analysis.
Nobody wants to miss a good market. But remember, it’s easy for clients to go too far when they see all the news stories about how great one asset class is performing. It’s up to you to make sure it all makes sense.