Even bulls are taking steps to protect profits after gains in U.S. stocks added $10 trillion to equity values, convinced the first decline in earnings since 2009 will spur losses in the historically weak second quarter.
Russ Koesterich of BlackRock Inc. and Valentijn Van Nieuwenhuijzen at ING Investment Management, who bought equities in 2012, say risks are rising during a period in which stocks have lost an average 5.2 percent since 2010, data compiled by Bloomberg show. Concern the U.S. economy isn’t expanding fast enough prompted Koesterich to sell smaller companies. Van Nieuwenhuijzen is holding off on new share purchases.
With the U.S. earnings season beginning today, forecasts for a profit contraction, sluggish economic growth and the market’s history of weakening at this time of year are spurring pessimism. Investors managing more than $5 trillion say they’re looking for ways to limit losses after the Standard & Poor’s 500 Index reached a record. That got harder in the first quarter, when rallies in drugmakers and utilities pushed valuations for so-called defensive industries to the highest since 2008.
“You have an increased risk of a correction now,” Koesterich, the chief investment strategist at New York-based BlackRock, the world’s largest money manager with $3.8 trillion in assets, said in an April 4 phone interview. “The parts of the market that have done the best, the defensives, have gotten very expensive,” he said. “This is a very different rally than what people are used to.”
Weekly Drop
The S&P 500 fell 1 percent to 1,553.28 last week, the biggest drop of 2013, after manufacturing expanded less than forecast and American employers added 88,000 jobs in March, trailing every estimate in a survey of 71 economists by Bloomberg. The decrease trimmed the rally since March 2009 to 130 percent.
Alcoa Inc. is forecast to post a 20 percent drop in profit when the aluminum producer starts the U.S. earnings season after the close of markets today. Income at S&P 500 companies dropped 1.8 percent in the first quarter, according to more than 11,000 analyst estimates compiled by Bloomberg.
A 10 percent rally in the first quarter pushed the S&P 500 to a record as reports on housing, hiring and consumer confidence showed the Federal Reserve’s near-zero interest rates and bond purchases were helping the economy expand.
First Quarter
“The first quarter took most investors by surprise on the strength and breadth of the equities market,” Jim Russell, the senior equity strategist at U.S. Bank Wealth Management, which manages about $110 billion, said in an April 1 phone interview. Russell, who said pensions and other funds owned too few shares in November, says he’s selling U.S. equities now and buying bonds. “We expect a pullback before too much longer.”