Stocks have come so far, so fast that investors are getting nervous.
With the S&P 500 up 30% last year and 6% more this year, it is just 2% off its July record. Even some mainstream advisers suggest caution.
"For investors concerned about short-term performance, I have been urging people to get a little more defensive and raise a little more cash to create a little more firepower for later," said David Joy, chief market strategist at Ameriprise Financial Inc., which oversees $810 billion.
Some fear a bear market, meaning a pullback of 20% or more. Mr. Joy expects a smaller decline. Others say the pullback is over and it is time to buy.
A central question is whether market excess is as bad as before the collapses of 2000 and 2008. In 2000, speculative fever infected many large stocks. In 2008, housing and lending excesses almost caused a depression.
Those aren't today's problems. But fears remain, notably because unprecedented Federal Reserve intervention has distorted markets in ways that are hard to evaluate.
Here are some issues on investors' minds:
The Fed: Many believe this bull market's main driver has been the central bank's decision to hold interest rates at their lowest levels since World War II, and to stimulate markets by buying more than $1 trillion in bonds.
Now the Fed is ending the bond-buying and preparing to raise interest rates next year. The prospect of higher rates, Mr. Joy said, could unsettle markets. But he and many others say investors should shrug that off because the Fed intends to move slowly and keep rates low for years. "I don't see a big problem but rather a source of temporary uncertainty" with stocks falling around 10% late this year, he said.
Adam Parker, Morgan Stanley's MS +0.99% chief U.S. stock strategist, said the pullback is already over. "I think this is a buying opportunity," he said.
High Prices: "Our clients are concerned that the market has come so far in the past five years that stocks are expensive," said Scott Wren, senior stock strategist at brokerage firm Wells Fargo Advisors.
The S&P 500 has nearly tripled since March 2009. It trades at 18.5 times its companies' reported profits for the past 12 months, according to Birinyi Associates. The long-term average is 15.5.
Stocks are expensive but not outrageous as in 2000, when the S&P 500 was near 40 times earnings. Stocks were about this expensive before 2008 but the big problem then wasn't valuation; it was housing and lending.
Joseph Mezrich, head of quantitative investment strategy at Nomura Securities, measures the earnings gains needed to justify stock prices. Stocks now price in 7% earnings growth, which is normal, he said.
"The way I value the market," he said, "there is no bubble at all." The S&P could rise 5% and it wouldn't be overvalued, he said.
Earnings: "For our clients," said Wells Fargo's WFC +0.84% Mr. Wren, "the No. 1 concern is that the economy is going to slip into recession again."
Corporate profits are rising less than 9% a year, much slower than early in the recovery. Mr. Wren tells clients this pace is fine but clients still hold more money in cash than he recommends, he said.
"Ultimately," said Mr. Parker at Morgan Stanley, "the trajectory of earnings is what matters" for stock prices and "I don't know of anybody who thinks earnings are going down in the second half of the year."
Geopolitics: Many analysts blame recent stock volatility on conflicts involving Ukraine, Russia, Iraq, Syria and Israel.
For stocks, only two aspects of geopolitics have mattered much in the past: energy prices and major U.S. troop involvement. With the latter unlikely, analysts focus on energy.
Oil is plentiful, so attention centers on fears Russia could disrupt natural-gas deliveries to countries including Germany. A European recession could damage stocks globally.
"Energy markets are a concern if there is any interruption in supply," said Mr. Joy of Ameriprise, but he and others said it would take a big energy-price jump to affect U.S. stocks much.
Speculation: Many worry that Fed cash injections and low interest rates have led to excessive investment with borrowed money.
Several market corners appear overheated, including biotech and social-media companies, junk bonds, some real-estate investment trusts and securities backed by bank loans. Junk-bond prices sagged in July, but have begun recovering.
Borrowed money with stocks as collateral, called margin debt, is at a record in dollar terms. But as a percentage of total stock-market value, it isn't near 2007 extremes, said independent market analyst Phil Roth.
However, investing today is dominated by hedge funds, which use other borrowing sources that are hard to track, Mr. Roth noted. No one knows how much they have borrowed. If hedge funds have to raise cash because of declines in risky investments made with borrowed funds, no one knows how many mainstream stocks they might sell.
Other potential problems are also hard to gauge: the seriousness of China's housing bubble, the strength of its financial system, the risk of global terrorism, the risk of another European financial blowup.
Still, by traditional measures, markets don't look as excessive as in 2000 and 2008.
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The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.
The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville. The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association.
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