The longest bull market run in history is coming to an end in 2019, according to the pros who handle Wall Street’s big-money clientele.
A survey of institutional investors show that 65 percent see a change coming, with the biggest threats being geopolitical tensions and rising interest rates, according to Natixis, which surveyed 500 managers of pension funds, endowments, foundations and the like. Respondents also included sovereign wealth funds and insurance funds.
In addition to seeing the bull market stopping, they also anticipate the next financial crisis coming in one to five years.
Despite the pessimism over where the market is heading, the collective portfolio allocation to stocks is expected to dip only slightly — from 38 percent to 36 percent. But 41 percent of those surveyed said they will be reducing allocation to U.S. equities.
Allocations are expected to increase slightly for bonds, from 37 percent to 38 percent, and cash, from 5 percent to 6 percent.
Managers also indicated they are increasing their share to active strategies and away from the passive approach that has been gaining popularity so much in what had been a low-volatility environment.
Institutional investors have been preparing for the end of the bull market for several years, David Goodsell, executive director of the Natixis Center for Investor Insight, said in an interview.
“The market is catching up to what they’ve been thinking about. I think they’ve been positioned for this for quite a while,” he said. “For the most part they’re staying put, except U.S. equities.”
While caution arises over the U.S., 48 percent of institutional investors say the best emerging market opportunity will come in the Asia Pacific region.
The results come amid a skittish atmosphere on Wall Street.
The S&P 500 has risen 305 percent since the bear market bottom of March 2009, but has showed persistent signs of fatigue this year. A barrage of geopolitical threats, from a nuclear North Korea to contentious Brexit negotiations, political upheaval at home, rising interest rates and a brewing U.S.-China trade war have disrupted the market this year and left it barely positive in the final month of trading.
The Federal Reserve, in a paper issued a week ago, warned that a “particularly large” slide in stock prices could come if some of the same risks cited in the survey materialize.
Bank of America Merrill Lynch strategists said they head into 2019 bearish on stocks, bonds and the U.S. dollar, and bullish on commodities and cash.
“With wildcards everywhere (trade, geopolitics, deficits, protectionism), we have decided to focus on the macro scenarios that seem most likely and most relevant for equity market performance: (1) more Fed tightening, and (2) an upward bias to volatility,” Savita Subramanian, BofAML’s equity and quant strategist, said in a research note.
The firm has a 2,900 target for the S&P 500, which actually represents 7.5 percent upside from the current level. But Subramanian noted that “we believe the peak in equities is likely before the end of 2019.”
Respondents to the Natixis survey say the biggest negative impacts to performance are likely to be geopolitical tensions (77 percent), trade disputes (74 percent) and central bank tightening (65 percent). The top portfolio risks are interest rates (56 percent), volatility spikes (52 percent) and regulations (32 percent).
Results also showed that 67 percent are worried they are taking on too much risk, though 75 percent said they are willing to underperform their benchmarks in order to protect against market downside.
Institutions see debt as the biggest threat to financial stability, followed by asset bubbles and a geopolitical crisis.