What's worrying advisors as bull market rolls on

The S&P 500 recently eclipsed the 5,300 mark, cracking the index’s all-time high. Clients are ecstatic upon opening their monthly statements. And, perhaps best of all, the kids will soon be headed off to summer camp making remote work even more of a joy.

Yes, it’s a wonderful time to be a financial advisor!

That is, of course, unless something goes horribly wrong, sending stocks southbound again.

So if there was one thing that could turn all those bullish smiles into bearish frowns, what might it be?

Michael Leverty, CEO and founder of Leverty Financial Group, says his biggest concern in the face of this seemingly unstoppable bull run is the potential for overvaluation.

“Many stocks are trading at high multiples relative to their historical averages, which can be a sign of excessive optimism,” said Leverty. “While US large-cap stocks, particularly in the tech sector, are often perceived as overvalued due to high price-to-earnings ratios and significant market run-ups, other market sectors and asset classes can offer more reasonable valuations.”

To protect his clients from a market turnaround should one arise, Leverty says the key is to remain focused on long-term goals and maintain a disciplined approach, recognizing that market timing is unpredictable and often leads to suboptimal investment decisions.

“Staying invested across multiple asset classes allows us to capture growth where it occurs and reduce the impact of volatility in any single segment of the market,” said Leverty.

Meanwhile, Danielle Darling, an LPL Financial Advisor with Resource One Advisors, remains optimistic that the bull market will keep charging ahead, primarily due to cooling inflation. If she were to pinpoint one thing that might ultimately derail the market’s upward climb, however, it is further speculation in the AI-fueled Magnificent 7 stocks leading to a bubble bursting situation. 

In terms of protection for nervous investors, Darling suggests incorporating an annuity with diversified holdings offers some downside protection while offering some healthy upside potential.

“Should the markets decline, your account may bleed less by having some downside protection that may range from 10 to 20 percent,” said Darling.

Eric Diton, president and managing director of The Wealth Alliance, points to the recent bullish about-face by Morgan Stanley strategist Mike Wilson as evidence that the bulls are now completely in charge. Earlier this week, Wilson threw in the proverbial towel after remaining skeptical of the rally for more than a year and boosted his target for the S&P 500 to 5,400 points from 4,500.

Diton says this increased level of bullishness does make him more cautious, but his biggest concern is that “inflation does not hit the 2% Fed target, rates stay high too long, and we ultimately are pushed into a recession as has happened frequently after an inverted yield curve.”

Geoffrey Schaefer, Wealth Advisor at Intergy Private Wealth, says the bear camp is incredibly attractive because when compared to optimism in the face of uncertainty like the bulls, bears seem incredibly sensible and thoughtful.

Said Schaefer: “They attempt to explain how the uncertainty will end and that mindset appeals to many investors.” 

Scheafer adds that the risks facing investors today are not much different than other times in history, but “inflation, interest rates, geopolitical landscapes, and equity valuations” are definitely the ones jumping out at him.

“Inevitably, this bull run - like all bull runs before it - will end, and our clients have to be positioned to benefit from the growth and weather the eventual downturn,” said Schaefer.

While earnings growth continues to be better than estimates and is expected to accelerate later this year, Stephen Kolano, chief investment officer at Integrated Partners, says there are a few areas he is watching for signs of stress. The major one is in the credit markets, not so much in 2024, but in the years thereafter due to debt issued after 2020. 

“As that debt comes due, the unknown is how the underlying company fundamentals will handle a potential cost of capital increase of 4 percent to 7 percent in some cases in relation to their own free cash flow generation and debt service coverage,” said Kolano.

Elsewhere, Tim Holland, CIO of Orion OCIO, is still biased toward the upside, but sees a number of reasons for investors to remain cautious for the rest of 2024, including the upcoming election which could increase market volatility and weigh on investor sentiment.

“If memory serves, US stocks often weaken into the fall of an election year and then catch a bid into year-end and move higher once the votes are counted,” said Holland, adding that he also expects the US economy to slow going forward, and unpleasant economic headlines could weigh on investor sentiment and risk assets.

Holland also reminds clients that “nothing goes up every day, all day,” and the current bull market should be put into perspective – especially when things get bumpy.

“The markets have had a great run since the bottom of the late 2022 bear market, through the late 2023 lows, and year-to-date,” said Holland. “Volatility to the downside should be expected, even in a bull market.”

Cyrus Amini, chief investment officer at Helium Advisors, believes the bears are "temporarily quiet," rather than vanquished. To protect his clients from some potential downside volatility, he has been rotating into more defensive sectors, hedged strategies, and upped his high-quality fixed income exposure.

“With the cost of capital for many companies at high levels combined with incremental signs of consumer weakness, current earnings projections look optimistic,” said Amini. “Margins are likely to come under pressure just when GDP starts slowing down.”

Finally, Daniel Brady, wealth manager at Savvy Advisors, has some reservations about the current bull market, even if they are mild. He sees the stickiness of inflation as the biggest risk.

“I think we are all now well aware that inflation is not going away overnight, it's a process that takes time,” said Brady. “That being said, the market has done a remarkable job of adjusting to the higher for longer interest rate environment. The question is, how long can the consumer sustain current spending levels with interest rates and inflation levels remaining elevated?”

Brady notes that the strong job market has allowed the consumer to continue to spend, but he does see signs of weakness developing. As a result, he is raising cash levels, when appropriate, for certain clients.

“Money markets are still yielding north of 5% and certain pockets of fixed income are more fairly priced than they have been in over a decade,” said Brady. “The higher the market runs, the greater the chance of a more severe correction. As advisors, we always have to keep a careful eye on downside risks.”