Wary investors slip back into the market

Deep unease remains about the future, however

By Trevor Hunnicutt

Jun 5, 2014 @ 1:44 pm EST

Bloomberg News

Many of John Merrill's clients are doing pretty well in the markets — and that's no surprise, given the fact that the U.S. stock market has risen for the last five years. But those clients aren't acting like they've won the lottery.

When Mr. Merrill, a fee-only planner at Houston-based Tanglewood Wealth Management Inc., talks to clients, he often hears: '“I don't like the market. But I don't like the zero return from cash as time goes on, either.'”

Despite dips here and there, the S&P; 500 reflects a pretty consistent run-up in prices: 5.24% year-to-date through Wednesday and more than 20% over the last year.

But if you look at the behavior of fund managers and retail investors, who are taking short positions and holding cash, it wouldn't seem like that was the case. A fund manager survey conducted by the firm last month found that fund managers are keeping 5% cash — the highest level since June 2012.

“This is probably one of the most hated bull markets I've seen,” said Mary Ann Bartels, chief investment officer of portfolio strategies for Merrill Lynch Investment Management and Guidance Group. “Find me somebody who's happy.”

Ms. Bartels said investors have some long-term grievances, such as the 2008-09 financial crisis, and some short-term ones as well.

Tactical investors responded to the Federal Reserve's decision to start reducing its massive bond-buying program in January by positioning fixed-income allocations for rates to go up; instead they fell, with the yield on the 10-year Treasury note declining to 2.58% in midday trading Thursday, from 3.04% at the end of last year.

Investors also expected the markets to continue their upward climb only to find dips like a nearly 6% retrenchment around the end of January. People positioned for a correction, or for the old idea to sell in May and go away, and then markets rose to new heights.

Some, including Federal Reserve Bank of New York president William Dudley, reportedly worry about an overly complacent market in which people may be willing to take on too much risk.

"Market choppiness could spring out of period of rotations as investors respond to the potential for slower emerging-markets growth and less liquidity as a result of the Fed tapering its stimulus program and/or increasing the fed funds rate," Stuart T. Freeman and Scott L. Wren, equity strategists for Wells Fargo Advisors, wrote in a note Thursday.

But others point to strong trends in the U.S., including the occasional value bargain in stocks and growing economic trends like the possibility of a more buoyant manufacturing sector.

Mr. Merrill said his clients are starting to turn the page, “slowly but steadily” revealing cash-like investments such as certificates of deposit for the first time, and asking him to put it to work in the market.

But his clients, many who are politically conservative, have a fairly dim view of the future.

“It's not that they dislike IBM or dislike Microsoft or think they're not doing well or can't do well — they're feeling the political environment, the social environment of the day, and the feeling they get is that things aren't that good, and it gets extrapolated to the market,” said Mr. Merrill, whose firm manages nearly $792 million. “How do you not worry if your 27-year-old is living at home? There is a general and a genuine concern that the future for the next generation isn't going to be as good as the past generation.”

After a tumultuous 2013, money is flowing back into traditional and nontraditional bond funds, to the tune of $38.6 billion and $5.1 billion in taxable and municipal bond funds, respectively, as of April 30, according to research firm Morningstar Inc.

But fixed income is proving to be a difficult area of the market, as advisers struggle to time what many see as an impending rise in interest rates.

“The bond market is probably going to have a lot of volatility in the future and not a lot of return,” said William B. Greiner, chief investment officer for Mariner Wealth Advisors, which manages nearly $10 billion. “The bond market is basically a return-less risk.”

For clients who absolutely must have bonds, he's avoiding duration risk at all costs and seeking extra return by taking somewhat more credit risk. More often, he's replacing bond allocations with alternatives, including master limited partnerships and real estate investment trusts.

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