By Ira Iosebashvili
A rally in stocks has triggered unusual circumstances for some
of Wall Street's biggest investors -- they are holding many of the
A list of the market's most crowded trades includes Mastercard
Inc., Microsoft Corp., Amazon.com Inc., Abbott Laboratories and
PayPal Holdings Inc., according to analysts at Bernstein, who
tracked institutional ownership, price momentum, earnings forecasts
The overlap in the top 50 stockholdings between mutual funds and
hedge funds -- two types of investors whose styles typically differ
-- now stands at near-record levels, a study by Bank of America
Merrill Lynch found.
Investors are drawn to stocks that have performed well and risen
fast. Shares that notched the fastest gains last year are valued
nearly 25% higher, compared with their next 12 months of earnings,
Bank of America's study showed. Big movers include Chipotle Mexican
Grill Inc., Starbucks Corp. and VeriSign Inc.
Some consequences of the trend were on display last week, after
earnings surprises from Amazon, Ford Motor Co., Tesla Inc. and
Google's parent Alphabet Inc. sparked outsize moves in their share
prices. Tesla and Ford, two stocks that have trended higher in
recent months, declined sharply when those companies reported
Meanwhile, Alphabet's stock soared after the company reported
that revenue rose 19% over the same period last year.
Big surges, like Alphabet's 9.6% gain on Friday, can make those
companies even more appealing to trend-following investors, further
concentrating them in a relatively small group of stocks, analysts
At the same time, few are willing to risk going against the
crowd. Stocks that are comparatively cheap have attracted little
interest, according to Bank of America's research.
Short interest on what is known as FAANG stocks -- Facebook
Inc., Apple Inc., Amazon, Netflix Inc. and Alphabet -- is at
historic lows, the bank said.
"This huge world of investible assets has shrunk down to a small
cohort, " said Savita Subramanian, equity and quantitative
strategist at Bank of America Merrill Lynch. "We're all in this
echo chamber where everyone goes to the same dinners and drinks the
This week investors are awaiting a spate of key economic
reports, including data on consumer spending, manufacturing and
Friday's nonfarm-payroll report, which investors will be using to
glean information on how the U.S. economy fared in July.
While most believe the Federal Reserve will deliver a 0.25
percentage-point rate cut at its meeting on Wednesday, strong
economic data could challenge projections for how much the central
bank will ease monetary policy during the rest of the year, a
potential obstacle for the market's rally.
As earnings season rolls on, investors will also get a look at
results from a range of companies, including Apple and Mastercard.
These two companies are among those that have provided money
managers safety in numbers.
Years of tepid expansion have also made investors hesitant to
broaden their holdings outside of the companies delivering
eye-catching results. That caution has been exacerbated in recent
months, as slowing growth around the world sparked fears of a
looming recession, widening the valuation gap between growth and
value stocks to record levels, data from DWS Group showed.
Yet some investors worry that the concentration of money in a
short list of stocks could exacerbate market declines if bad news
sparks a rush to the exits. Some of the same large tech stocks led
a May selloff that pulled the Nasdaq Composite into correction
territory with a more than 10% decline from its highs, a steeper
drop than the ones that hit the Dow Jones Industrial Average and
Contrarian and value-oriented strategies have waned in
popularity in recent years as investors struggle to outperform
market-tracking funds. Disagreement among analysts about a
company's earning prospects can also make shares comparatively
Kent Engelke, managing director at Capitol Securities
Management, has avoided those big tech stocks over the past three
years, concentrating instead on finding stocks that are undervalued
relative to the rest of the market. Lately, that has led him to
invest in unglamorous areas like consumer nondurables and the oil
"I'm miserable," he said. "The last three years have been among
the most difficult ever out of 33 in the industry because we
haven't owned FAANG."
He plans on sticking to his guns, however, convinced that the
rally can fall apart if the Fed eases monetary policy less than
expected or if companies' balance sheets worsen.
That could result in "a really big, ugly selloff," he said.
So far, few investors seem inclined to change their approach,
although many are now increasing their positions in assets that
would take the edge off a potential hit to their portfolios. Prices
for gold, a popular destination for nervous investors, are near
their highest level in six years, while the Swiss franc stands at a
two-year high against the euro.
Analysts at UBS Global Wealth Management said that markets may
be overestimating how far the Fed will cut rates and that trade
tensions between the U.S. and China could weigh on growth.
They have balanced their U.S. stockholdings with positions in
havens like long-maturity Treasurys and the Japanese yen.
"We don't think the alarms should be ignored," Mark Haefele,
chief investment officer at UBS Global Wealth Management, said in a
note to clients. "But we also think the long-term opportunity cost
of aborting is likely to be too high."
Write to Ira Iosebashvili at email@example.com
(END) Dow Jones Newswires
July 28, 2019 19:48 ET (23:48 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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