It's always a good time to check the riskin your retirement portfolio and to ask yourself what you would do if - if -
the stock market fell by, say, a third or even half.
That's what can happen in a bear market,and often does.
It may be a particularly good time to askthat question now. Red warning flags are springing up all over Wall Street, and
they are becoming increasingly hard to ignore.
The latest comes from Bank of America'smonthly survey of global money managers, which shows alarming levels of
complacency among the people managing many of the world's top investment
institutions.
Actually, "alarming" isn't thebest word. "Surreal" might be better.
More than 170 money managers handling, intotal, nearly $500 billion in investments, told the bank's latest survey that
they are enormously bullish on stocks and are taking on very high levels of
risk in their portfolios.
At the same time, a majority tell the bankthat they think stocks are overvalued, that artificial-intelligence stocks in
particular are in a "bubble," and that the bursting of that bubble
constitutes by far the biggest individual risk to the market.
Confused? You are not alone. But this isdisturbingly normal in this industry. Nobody wants to be the first to jump off
the bandwagon, no matter how close it gets to the cliff, for fear of missing
out.
The bank reports that on 20 separateoccasions since 2002, fund managers have let the cash balances in their
portfolios drop to 3.7% of the total value or less, "and on every occasion
stocks fell and Treasurys outperformed in the following 1-3 months."
Cash levels in the latest survey? Oh ...3.7%.
Yikes.
A majority of fund managers also warn thatthey expect long-term interest rates on longer-term U.S. Treasury bonds to rise
if the Supreme Court throws out some or all of President Donald Trump's
revenue-raising tariffs. But apparently that's not enough to scare them out of
the stock market, either. Actually, 34% of managers say they think that if the
court throws out the tariffs and yields rise, stocks will also rise.
Cue my long-running belief that pretty mucheverything you need to know about Wall Street you could learn from the Marx
Brothers.
(Incidentally, the few assets in which fundmanagers reveal they are heavily underinvested include cash, energy stocks, the
shares of consumer discretionary and consumer staples companies, and, as usual,
British stocks.)
The survey was conducted earlier this month- just before the selloff that has cut the S&P 500 SPX by 3% in a handful
of days. The main stock-market index has now fallen below its 50-day moving
average, another signal that has been known to portend trouble.
The latest fund-manager survey comes just aday after Jeffrey Gundlach, the so-called bond king, warned about market danger
ahead and urged investors to move a remarkable 20% of their portfolios into
cash or short-term Treasury bills. Gundlach thinks the average investor holds
too much of their money in stocks, and especially U.S. stocks, and too much in
bonds as well.
And this came just days after the news thatMichael Burry, the hedge-fund manager who made a fortune predicting the global
financial crisis and who was made famous by the book and movie "The Big
Short," had deregistered his hedge fund.
It's an old Wall Street saying that a bullmarket doesn't end "till the last bear turns bullish," or at least
until they capitulate. Burry deregistering his fund doesn't prove anything
about the markets, of course, but it's the sort of thing that you tend to see
at the peak. (It was at the peak of the dot-com bubble, in early 2000, when all
the fund managers who had resisted the madness got fired.)
Burry has big bets against highflying AIstock Palantir (PLTR), which is currently trading at $170 (down from $208 a few
weeks ago). Last week on the social-media platform X, he revealed that he owned
put options on Palantir that will make a profit if the stock falls below $50 by
2027. Puts are derivatives - bets that a stock will fall. Burry said the
options cost him $1.84 each. The only 2027 Palantir puts that were that around
price in recent months are those that come due in January 2027, some 14 months from
now.
It may be tempting to see the recentselloff as an opportunity to "buy the dip," but so far the S&P
500 has fallen just 3% from its record high a few weeks ago, and the Nasdaq
composite COMP is down just over 5%.
Such declines are normal stock-marketvolatility and a fraction of what to expect if we were to fall into a bear
market. One may come, or it may not. But investors should ask themselves
whether they are ready if one does.