QMA is a business of Prudential Financial and its managing director Ed Keon, a frequent guest on CNBC, has been a long-time optimist about the stock market. Lately, however, the firm has turned cautious.
Strategists there offer some words of wisdom this week on why:
So have equities come too far too fast and are we overdue for a pullback? We think in general the answer is yes. We have not seen a meaningful pullback in stocks in roughly 18 months (during the last China growth scare), when historically the average time between equity pullbacks of 5 percent or more is two to three months. Further, stocks and other risky assets look stretched and somewhat pricey against a very low volatility backdrop. So, we think investors are bordering on complacent and the usual fears of a summer swoon are probably more justified than not this year.
Currently, we are positioned cautiously and not straying too far from our policy benchmarks in our multi-assets portfolios. We are neutral on U.S. stocks and modestly overweight EAFE (developed markets outside the U.S. and Canada), where we believe valuations are better and earnings still cyclically depressed and thus have more room to run. The euro area in particular is several years behind the U.S. in terms of business and monetary policy cycles and its economic prospects are the best they have been in a decade. The promise of structural reform in France, following the election of centrist reformer Emmanuel Macron in June, is also constructive. But the upcoming election in Italy bears watching.
While we are wary near term, we do not believe a recession or bear market is imminent, so we are inclined to view any meaningful pullback as an opportunity to add exposure. The bull market is at a mature stage, but we do not believe it is ready to roll over just yet.
So it’s basically just a word to the wise rather than a note of alarm. But it’s worth noting a cautious tone from a long-term market bull.