Bull Market Built on Fear May Have More Room to Go, According to BNY Mellon ISSG

NEW YORK and LONDON, March 28, 2013 /PRNewswire/ -- The return of U.S. investors to equities markets and more aggressive investing by non-U.S. investors could drive stock prices higher, even after a four-year rally that has more than doubled prices, according to a recent white paper from the BNY Mellon Investment Strategy & Solutions Group (ISSG).

U.S. investors could be reaching an inflection point where they begin returning to equities after years of seeking safer assets and missing the rally that began in March 2009, according to the paper: What if Something Goes Right? Equity Market Risk Signals and the Great Rotation.

The report also notes that the non-U.S. investors who have been fueling the bull market have enough buying power to send the prices of stocks in general and growth stocks in particular higher. These non-U.S. equities investors have been concentrating their investments primarily in defensive stocks, the report said.

"While stocks have rallied sharply, the gains have been built on a foundation of worry and risk aversion," said Robert Jaeger, senior investment strategist for ISSG and co-author of the report.  "These worries are reflected by the valuation premiums that defensive sectors command over growth-oriented sectors.  This combination of investor sentiment and valuations could indicate that investors in the U.S. and abroad have substantial potential buying power to acquire growth stocks, even after the big move that we've had." 

Various sources of concern such as the U.S. fiscal cliff, the possible breakup of the eurozone and slowing growth in China did not stop the rise of equities during late 2012 and early 2013, according to the ISSG report.   Still, U.S. investors tended to overweight defensive and dividend-growing sectors while avoiding growth stocks, even when they did move to stocks, the report said.

"They are more focused on what can go wrong than what can go right," said Jaeger.   "But if things go right, too many investors could miss any continuation of the rally if it develops."

A familiar risk is that everyone could move to growth at the same time, creating a bubble and then a possible correction, according to the report.

However, this time there appears to be a supply of equities that could come on the market as defined benefit pension plans sell stocks as they rise to higher prices, the report said.  These plans are more interested in buying bonds to insulate their portfolios against further market volatility, said ISSG.

"These plans typically are more concerned about hedging their liabilities under the accounting rules governing pension plans, which means they will need to own long-term bonds," said Jaeger.  "That is more important to this group of investors than maximizing their returns by staying invested in equities."

Despite the sharp rise in stock prices since 2009, U.S. mutual fund investors continued to flee stocks over the last three calendar years to buy bonds, according to the Investment Company Institute.  These investors have been moving to safer assets since the onset of the financial crisis in 2007.

"So, while U.S. investors were avoiding U.S. stocks, non-U.S. investors were buying them right through the current rally," said Jaeger.  "Many U.S. investors continued to buy bonds even while government bond yields in the U.S., Japan, and Germany are at historic lows as investors willingly accepted artificially low interest rates created by the easing monetary policies of central banks."

The positions taken by options traders also indicates that investors are more concerned with avoiding a falling equities market than taking advantage of a possible rise in the markets, the report said. 

"While we can't predict the direction of the equities markets over the next six months, we need to ask if the current strength in equities has some staying power," said Jaeger.  "If it does, we could be seeing a growing number of investors regaining their risk appetite at the same time defined benefit pension plans are selling equities for non-economic reasons.  This could create a slow, upward movement for stocks that would not feel like a bull market, or a bubble."

Notes to editors:

BNY Mellon's Investment Strategy and Solutions Group is a division of The Bank of New York Mellon.  In Asia, Europe, the Middle East and Africa, the ISSG offers products and services, including investment strategies that are developed by affiliated BNY Mellon Investment Management investment advisory firms, to clients through BNY Mellon Asset Management International Limited. In the US, ISSG is part of The Bank of New York Mellon.

BNY Mellon Investment Management is one of the world's leading investment management organizations and one of the top U.S. wealth managers, with $1.4 trillion in assets under management. It encompasses BNY Mellon's affiliated investment management firms, wealth management services and global distribution companies. More information can be found at www.bnymellon.com.

BNY Mellon is a global investments company dedicated to helping its clients manage and service their financial assets throughout the investment lifecycle. Whether providing financial services for institutions, corporations or individual investors, BNY Mellon delivers informed investment management and investment services in 36 countries and more than 100 markets. As of December 31, 2012, BNY Mellon had $26.2 trillion in assets under custody and/or administration, and $1.4 trillion in assets under management. BNY Mellon can act as a single point of contact for clients looking to create, trade, hold, manage, service, distribute or restructure investments. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE: BK). Additional information is available on www.bnymellon.com, or follow us on Twitter @BNYMellon.

All  information source BNY Mellon as of December 31, 2012. This press release is qualified for issuance in the UK and US and is for information purposes only. It does not constitute an offer or solicitation of securities or investment services or an endorsement thereof in any jurisdiction or in any circumstance in which such offer or solicitation is unlawful or not authorized. This press release is issued by BNY Mellon Investment Management (US) and BNY Mellon Asset Management International Limited (ex-US) to members of the financial press and media and the information contained herein should not be construed as investment advice. Past performance is not a guide to future performance.  The value of investments and the income from them is not guaranteed and can fall as well as rise due to stock market and currency movements.  When you sell your investment you may get back less than you originally invested. Registered office of BNY Mellon Asset Management International Limited: BNY Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Registered in England no. 1118580. Authorized and regulated by the Financial Services Authority. A BNY Mellon Company.

SOURCE BNY Mellon

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