By Noel Randewich and Ryan Vlastelica
SAN FRANCISCO/NEW YORK (Reuters) - Stock investors are expected to
tread carefully next week, as speculation about the timing of a U.S.
Federal Reserve interest rate hike adds to concerns about valuations.
Since
hitting record levels two weeks ago, the U.S. stock market has
struggled for direction, and investors said the next several sessions
might prove no better. A run of better-than-expected economic figures
failed to boost sentiment and instead renewed focus on whether the Fed
will begin to raise short-term lending rates before long.
At
the moment, individual investors lack any particularly strong
inclination to buy or sell. Investors polled by the American Association
of Individual Investors have increasingly said they are "neutral" on
the market, suggesting uncertainty about where stocks are going.
The
most recent AAII survey showed 48 percent of investors polled have
neutral outlooks for the market for the next six months, while 27
percent are bullish and 25 percent are negative. The bullish figure has
been below 30 percent for five weeks, the longest since 2003, while the
neutral figure has exceeded 45 percent for nine weeks, longest in the
28-year history of the survey.
One
looming concern is the steady increase in investors using borrowed
money to buy stocks. Total margin debt hit a record $507 billion in
mid-April, according to the most recent figures from the New York Stock
Exchange, trending higher along with the S&P.
"There's
complacency, more complacency than I'm comfortable with. It makes me
nervous," said Leo Grohowski, chief investment officer at BNY Mellon
Wealth Management in New York. "Market participants don't seem prepared
for an uptick in volatility, which is consistent with high levels of
margin debt."
High levels of margin debt do not
necessarily mean a selloff is coming. But they can make selloffs more
violent should volatility pick up.
"Margin debt is
usually at record highs when markets peak, but it’s also usually at
record highs in the months and years leading up to a market high," said
Paul Hickey of Bespoke Investment Group.
An increase
in market volatility could quickly worsen market sentiment, which could
become amplified by high margin levels, they warned. The market has
been in a trading range for several weeks, and some worry that a break
lower could be violent.
About 280,000 jobs were
added in May, the largest gain since December and well above consensus
forecasts. Economists largely expect the Fed will begin raising rates by
September, and this number solidified that expectation for many.
"The
market is addicted to the Fed's liquidity, and this certainly puts more
ammunition in the Fed's plan to start lift-off in September. It makes
sense that the market would fall off on that," said Mark Luschini, chief
investment strategist at Janney Montgomery Scott in Philadelphia.
(Reporting by Noel Randewich and Ryan Vlastelica; Editing by Meredith Mazzilli)
