Bull Market Built on Fear May Have More Room to Go, According to BNY Mellon ISSG

Thu Mar 28, 2013 9:55am EDT

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U.S. Investors Who Missed Four-Year Rally Could Be Ready to Return to Market
NEW YORK and  LONDON,  March 28, 2013  /PRNewswire/ -- The return of U.S.
investors to equities markets and more aggressive investing by non-U.S.
investors could drive stock prices higher, even after a four-year rally that has
more than doubled prices, according to a recent white paper from the BNY Mellon
Investment Strategy & Solutions Group (ISSG).  

U.S. investors could be reaching an inflection point where they begin returning
to equities after years of seeking safer assets and missing the rally that began
in  March 2009, according to the paper:  What if Something Goes Right? Equity
Market Risk Signals and the Great Rotation.  

The report also notes that the non-U.S. investors who have been fueling the bull
market have enough buying power to send the prices of stocks in general and
growth stocks in particular higher. These non-U.S. equities investors have been
concentrating their investments primarily in defensive stocks, the report said.

"While stocks have rallied sharply, the gains have been built on a foundation of
worry and risk aversion," said  Robert Jaeger, senior investment strategist for
ISSG and co-author of the report.  "These worries are reflected by the valuation
premiums that defensive sectors command over growth-oriented sectors.  This
combination of investor sentiment and valuations could indicate that investors
in the U.S. and abroad have substantial potential buying power to acquire growth
stocks, even after the big move that we've had."   

Various sources of concern such as the U.S. fiscal cliff, the possible breakup
of the eurozone and slowing growth in  China  did not stop the rise of equities
during late 2012 and early 2013, according to the ISSG report.   Still, U.S.
investors tended to overweight defensive and dividend-growing sectors while
avoiding growth stocks, even when they did move to stocks, the report said.  

"They are more focused on what can go wrong than what can go right," said
Jaeger.   "But if things go right, too many investors could miss any
continuation of the rally if it develops."

A familiar risk is that everyone could move to growth at the same time, creating
a bubble and then a possible correction, according to the report.

However, this time there appears to be a supply of equities that could come on
the market as defined benefit pension plans sell stocks as they rise to higher
prices, the report said.  These plans are more interested in buying bonds to
insulate their portfolios against further market volatility, said ISSG.

"These plans typically are more concerned about hedging their liabilities under
the accounting rules governing pension plans, which means they will need to own
long-term bonds," said Jaeger.  "That is more important to this group of
investors than maximizing their returns by staying invested in equities."

Despite the sharp rise in stock prices since 2009, U.S. mutual fund investors
continued to flee stocks over the last three calendar years to buy bonds,
according to the Investment Company Institute.  These investors have been moving
to safer assets since the onset of the financial crisis in 2007.

"So, while U.S. investors were avoiding U.S. stocks, non-U.S. investors were
buying them right through the current rally," said Jaeger.  "Many U.S. investors
continued to buy bonds even while government bond yields in the U.S.,  Japan,
and  Germany  are at historic lows as investors willingly accepted artificially
low interest rates created by the easing monetary policies of central banks."

The positions taken by options traders also indicates that investors are more
concerned with avoiding a falling equities market than taking advantage of a
possible rise in the markets, the report said.   

"While we can't predict the direction of the equities markets over the next six
months, we need to ask if the current strength in equities has some staying
power," said Jaeger.  "If it does, we could be seeing a growing number of
investors regaining their risk appetite at the same time defined benefit pension
plans are selling equities for non-economic reasons.  This could create a slow,
upward movement for stocks that would not feel like a bull market, or a bubble."

Notes to editors:

BNY Mellon's Investment Strategy and Solutions Group  is a division of The Bank
of New York Mellon.  In Asia,  Europe, the  Middle East  and  Africa, the ISSG
offers products and services, including investment strategies that are developed
by affiliated BNY Mellon Investment Management investment advisory firms, to
clients through BNY Mellon Asset Management International Limited. In the US,
ISSG is part of The Bank of New York Mellon.

BNY Mellon Investment Management  is one of the world's leading investment
management organizations and one of the top U.S. wealth managers, with  $1.4
trillion  in assets under management. It encompasses BNY Mellon's affiliated
investment management firms, wealth management services and global distribution
companies. More information can be found at  www.bnymellon.com.

BNY Mellon  is a global investments company dedicated to helping its clients
manage and service their financial assets throughout the investment lifecycle.
Whether providing financial services for institutions, corporations or
individual investors, BNY Mellon delivers informed investment management and
investment services in 36 countries and more than 100 markets. As of  December
31, 2012, BNY Mellon had  $26.2 trillion  in assets under custody and/or
administration, and  $1.4 trillion  in assets under management. BNY Mellon can
act as a single point of contact for clients looking to create, trade, hold,
manage, service, distribute or restructure investments. BNY Mellon is the
corporate brand of The Bank of New York Mellon Corporation (NYSE: BK).
Additional information is available on  www.bnymellon.com, or follow us on
Twitter @BNYMellon.

All  information source BNY Mellon as of  December 31, 2012. This press release
is qualified for issuance in the UK and US and is for information purposes only.
It does not constitute an offer or solicitation of securities or investment
services or an endorsement thereof in any jurisdiction or in any circumstance in
which such offer or solicitation is unlawful or not authorized. This press
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Mike Dunn, +1-212-922-7859, mike.g.dunn@bnymellon.com, or Sarah Deutscher,
+44-20-763-2744, sarah.deutscher@bnymellon.com

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