The US stock market is off to a great start in 2018. What’s more, should the current bull market survive into late summer, it will be the longest rally on record.
Corporate earnings and the overall economy are on solid footing, but that’s not to say portfolios don’t face near-term risks.
JPMorgan Chase & Co. strategists recently warned clients to go underweight on government bonds in the near term due to the” uptick in global growth and boost to risk-on assets,” according to Bloomberg News.
According to the JP Morgan strategists:
“U.S. corporate tax reform is a significant positive catalyst for equities and it should lead to rotation from bonds to equities. Broad and sustained economic growth across regions further reinforces our allocation thesis.”
Morgan Stanley, meanwhile, is warning its clients to beware of a rotation into defensive stocks such as utilities and REITs should Treasury yields fall.
“We are not calling for the end of the cyclical expansion yet, but we do believe a pause in relative performance versus defensives may be likely in the near term and could wreak havoc on client portfolios given the extreme positioning we are witnessing in the long cyclical and short defensive/bond proxy sectors”
If so, that would mark a big reversal from recent trends.
Investors have been enjoying huge gains in financial, tech and energy shares have led the S&P 500, rising at least 19% in past six months. Real estate and utility stocks haven’t performed as well.
Stock investors have enjoyed an amazing ride in recent years.
But, in my opinion, even in a rising market, portfolios can take a beating from rotation shifts if investors aren’t prepared.
In my view, investors should watch out for rotation risk in the months ahead.