RPT-UPDATE 1-Wall St went bearish...just before stocks rebound
(Repeats Oct. 11 story for wider readership)
* Firms shift to underweight equities in past few weeks
* Some investment gurus predicting recession
* Biggest shift for Morgan Stanley Smith Barney since 2009
(Updates with market gains in 5th paragraph, and rewrites in part)
Oct 11 (Reuters) - Clients of some big Wall Street firms have probably missed out on a sharp recovery in stocks over the past few days.
The firms, who were cautiously optimistic or bullish through the summer selloff, have turned bearish just as the market seems to be clawing back.
Between Sept. 18 and Oct. 6, several Wall Street houses who mostly stood pat through months of market volatility and heavy declines finally decided enough is enough.
Morgan Stanley Smith Barney, Wells Fargo Advisors and UBS have scaled back their portfolios' exposure to equities in the past three-and-a-half weeks, shifting away from stocks and into fixed income and cash.
Meanwhile, the S&P 500 Index had its biggest rally in nearly six weeks on Monday and has gained 8.8 percent in the past six trading days.
Despite that, investment officers at the firms say they don't don't believe governments in Europe and the U.S. are doing enough to address the crushing debt undermining their financial systems.
Investment managers said they believe the ongoing uncertainty and wild market swings are here to stay. What's more, the volatility suggests to some investment strategists that another recession is increasingly likely. [ID:nN1E7931GA]
European leaders have been meeting for months to address the debt crisis plaguing the continent. What little progress there has been is not happening fast enough, said Jeff Applegate, chief investment officer at Morgan Stanley Smith Barney, the brokerage arm of Morgan Stanley (MS.N).
European Central Bank President Jean-Claude Trichet warned on Tuesday that the crisis had "reached a systemic dimension."
At the same time, in the U.S. the government has been unable to get much accomplished, Applegate said. For example, President Obama's jobs-creation package was defeated in the U.S. Senate on Tuesday.
"You have seen a lot of change since August," Applegate said. "And the policy responses have not been been swift enough or large enough."
On Oct. 6, Morgan Stanley Smith Barney shifted the allocation of its portfolios from overweight on global equities, commodities and real estate investment trusts to underweight, while going overweight from underweight on cash and global bonds.
"This is a big shift for us, the biggest we have made since April 2009," Applegate said. At that time the firm shifted to overweight equities as the markets rebounded after the financial crisis.
One major factor in Morgan Stanley Smith barney's decision to cut back on risk was a Sept. 21 report by the Economic Cycle Research Institute predicting a recession. ECRI has successfully predicted the past four U.S. recessions.
On Oct. 1, Wells Fargo Advisors, the brokerage arm of Wells Fargo & Co. (WFC.N) went from neutral to underweight on its equity exposure in its cyclical asset allocation portfolios.
Wells, which reevaluates its portfolios on a quarterly basis, first reduced its equity exposure slightly in April, but cut exposure even further this month due to fears about the European debt crisis, said Stuart Freeman, chief equity strategist at Wells Fargo Advisors.
The firm in April shifted its moderate growth & income portfolio to 58 percent in equities from 63 percent. This month, the fund decreased its share of equities again, to 45 percent.
Wells Fargo Advisors now predicts a 35 percent chance for a U.S. recession, up from a 20 percent chance four months ago, Freeman said. The chances of a recession in Europe, according to the firm: 40 percent, up from 25 percent a few months ago.
Similarly, UBS (UBS.N) shifted its portfolios from neutral to underweight equities on Sept. 18.
"We felt that the fundamental issues affecting the markets had not been resolved," said Mike Ryan, head of research for wealth management at UBS. Ryan doesn't think the United States is necessarily headed for a recession.
"We think you will see choppy, sluggish growth," he said.
Of course, not every firm is scaling back on equities. Equity strategists at Bank of America Merrill Lynch (BAC.N) - whose logo is a bull -- are maintaining their overweight position on equities, albeit a "moderate" overweight position, said Kate Moore, global equity strategist at Bank of America Merrill Lynch.
She said that too many investors have held too small a position in equities since the market crash of 2008 and missed the rally. Furthermore, she said she believes Europe is closer to coming up with a solution for its problems.
"We are seeing a willingness of policy makers in Europe to put things together," she said.
Bank of America Merrill Lynch's economists forecast U.S. GDP growth of 2.5 percent for the third quarter, she said.
"That's a far cry from the two quarters of negative GDP growth that define a recession," Moore said.
(Reporting by Jessica Toonkel, editing by Jennifer Merritt, Walden Siew and Martin Howell)
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