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Abreast Of The Market
Lagging Funds Fuel 2015 Worries
From the Wall Street Journal of Sun, 21 Dec 2014 20:06:27 EST

The elastic U.S. stock market keeps snapping back, but last week’s surge is deepening concerns about a possible stock-price stumble in early 2015.

A burst of buying by mutual-fund managers and other investors who are trying to catch up with the overall stock market’s climb this year helped spark a 736-point jump by the Dow Jones Industrial Average from Wednesday through Friday.

Three straight days of gains left the blue chip stock index at 17804.80, or less than 1% below its record of 17958.79 reached Dec. 5. The surge came right after an 890-point slide that included declines in six out of seven trading days.

Fuel for last week’s stock-market gains came from investor confidence that the U.S. economic recovery is for real, inflation will stay low and interest-rate increases expected from the Federal Reserve next year won’t end the bull market.

Another source of upward momentum for stocks is causing jitters, though. Many money managers whose recent performance lags behind the overall market are hoping for a last-minute boost from pumping cash into especially fast-rising stocks, investment strategists say.

Those managers are desperate to boost their performance so they won’t look bad compared with the index they are tracked against, usually the S&P 500. “If you are among the 85% of money managers behind the S&P 500, this is a chance to catch up,” said Jack Ablin, chief investment officer at BMO Private Bank, a unit of Bank of Montreal that oversees $68 billion.

The concern is that those investors might move at least some of their money elsewhere after New Year’s Day. Something similar happened at the start of 2014, when the Dow fell 7.3% in January and early February. Bad weather hurt stocks then, too, but January usually is a strong month as retirement money flows into the market.

After stumbling at the start of this year, the Dow rose to a record high in April. Since then, the giant-company index has stumbled three more times but then recovered faster each time. Last week’s rebound was so sharp that you could carve a holiday turkey with it.

But the latest jump hasn’t erased qualms about how expensive U.S. stock indexes are compared with sales and profits at companies in those indexes. As of Friday, the S&P 500 had an overall price-to-earnings ratio of 19.5, up from 18.6 a year earlier and the long-term average of 15.5, according to Birinyi Associates, a money management and research firm.

The higher stocks rise, the harder it is to keep surpassing expectations. As a result, many stock-market strategists are forecasting single-digit percentage gains in 2015.

So far this year, the Dow is up 7%, a far cry from its 26% leap in 2013. The S&P 500 has gained 12%, compared with 30% in 2013.

One of the biggest reasons why the Dow has underperformed the S&P 500 in 2014: Three of the 30 stocks in the Dow—Boeing Co., Chevron Corp. and International Business Machines Corp.—are down more than $10 each.

The S&P 500 is trading at 1.7 times its companies’ sales for the past 12 months, or 20% higher than the index’s historical median, Mr. Ablin calculates.

If U.S. stocks get even pricier, he will consider shifting money from the U.S. to lower-priced markets elsewhere.

For now, though, Mr. Ablin is sitting tight because selling would trigger 2014 capital-gains taxes and cause him to miss out on any last end-of-the-year stock-price climbs in the U.S.

Since 1928, the Dow has risen 79% of the time during the last seven trading days of the year, which is how many remain in 2014. The average gain during the seven-day period was 1.4%, according to Bespoke Investment Group.

Some investment experts say they aren’t feeling any jitters about the short-term burst of money into U.S. stock markets.

Stocks recovered from this year’s January slump by April. This time, they still are short of the Dec. 5 record high, says investment strategist Jason Pride at Glenmede Trust Co., which oversees $28 billion.

The latest rebound was fueled largely by shifting views on recent oil-price declines, he says. Many investors initially feared trouble in currency and debt markets. Now, those investors are coming around to the view that cheaper oil will be positive overall, Mr. Pride says.

“I don’t think it is necessarily performance-chasing into the year end. It could be justified as people digest what lower oil prices mean,” Mr. Pride says. “Some of those fears are legitimately dissipating.”

Still, Mr. Pride agrees that high stock prices make it harder for the market to produce big returns. Like many investors, he expects stock-market gains in 2015 that are similar in size to corporate-earnings gains, though he wouldn’t be surprised to see stocks top expectations again as they did in 2013 and 2014.

“There is a good argument that these are the valuations you sit at in an economic expansion, and that valuations can even expand” as investors pile into a rising market, he says. In previous bull markets, stocks have gotten more expensive than they are now, although the higher they go, the riskier they get.

Now that the Fed has stopped making huge bond purchases to support markets and is preparing to raise short-term interest rates, stock swings could be even sharper in 2015, says Kristina Hooper, U.S. investment strategist at Allianz Global Investors, which oversees $488 billion. The asset-management firm is part of Allianz SE.

“The stock market is taking two steps forward and one back, sometimes 11/2 ” steps back, Ms. Hooper says. “Our concern is that we are likely to see more volatility going forward, not less.”

It will be worse if the Fed shows signs of raising interest rates in mid-2015, she says. While interest-rate futures suggest that many investors expect rates to remain steady until the second half of 2015, Ms. Hooper believes the Fed will move before then, which could cause anxiety in the overall market.

In addition, “there is the likelihood that the market could sell off a bit in January,” Ms. Hooper says. “We could see a revisiting of concerns about valuations.”

If an early-year selloff erupts, she doesn’t expect long-lasting damage. Still, her overall projection is for single-digit percentage gains by major stock indexes in 2015. And there will be some thrills and spills along the way, Ms. Hooper predicts.

What the past few trading days have shown is that investors remain hopeful about the economy and afraid of missing out on stock-price gains.

At the same time, many investors don’t want to be too exposed if expensive U.S. stocks suddenly slump. In 2014, the same combination created temporary jitters, but nothing more severe than that.

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