T.Rowe Price Issues A Warning For Investors, Cuts Stock Allocation To Lowest Since 2000

One day after DoubleLine chief Jeff Gundlach told Bloomberg TV that it is time for investors to head for the exits as his highest conviction trade is "volatility is about to go up", and that he is reducing his positions in junk bonds, EM debt and other lower-quality investments on fears investor sentiment may roll over (explaining later to CNBC that he expects to make no less than 400% on his S&P puts) today two other money-managing titans - T.Rowe Price and Pimco - both issued similar warnings to investors, urging investors to start taking profits.

In its latest Midyear asset allocation report "Preparing for Pivot Points", bond giant Pimco said Investors should pare stocks and high-yield debt while shifting to lower-risk assets, such as Treasuries and mortgage-backed securities. Some selected excerpts:

"After reviewing the landscape, we conclude that the lack of near-term positive catalysts combined with current valuations does not offer sufficient margin of safety to support a risk-on posture."

"While we wait for clarity on key risks or more attractive valuations, we are focused on quality sources of yield to increase portfolio carry while still keeping some dry powder."

"With the macroeconomic backdrop evolving in the face of potentially negative pivot points and considering asset prices generally are fully valued, we are modestly risk-off in our overall positioning" Pimco MDs Mihir Worah and Geraldine Sundstrom wrote in today's report released Wednesday adding that while “we recognize events could still surprise to the upside, but starting valuations leave little room for error.”

Pimco’s allocation recommendations also mark a shift from the start of 2017 for the firm, which managed $1.61 trillion as of June 30. One change since February is the reduced prospects of a U.S. fiscal stimulus, such as tax reform or infrastructure spending, under President Donald Trump.

“We expect that any U.S. fiscal package that passes be tilted to tax cuts, but light on reform,” Worah wrote while also warning that “we see limited fiscal space in Europe.”

Overall, Pimco, which is "risk-off" overall risk, recommends underweighting equities, especially U.S. stocks, following recent rallies. The firm also advises to reduce high-yield debt as defaults could climb and yield spreads could widen, while keeping exposure to better-quality credit, such as non-agency MBS likely to benefit from a healthy U.S. housing market. Pimco suggests maintaining investments in “real assets,” such as inflation-linked bonds, commodities, gold and real estate investment trusts (see full report here).

In a similar warning, T. Rowe Price also urged to allocated away from stocks, noting that it cut the stock portion of its asset allocation portfolios to the lowest level since 2000. The Baltimore-based money manager said it also reduced its holdings of high-yield bonds and emerging market bonds for the same reason, Bloomberg noted.

“Everything is expensive and we are late in the business cycle,” Sebastien Page, head of asset allocation at T. Rowe Price said in an interview with Bloomberg. “That introduces fragility for risk assets and there isn’t much buffer.”

The move will affects $265 billion of the $904 billion under management at T. Rowe Price, and only applies to asset allocation portfolios, said Page. A typical portfolio with 60% stocks and 40% bonds now holds 58 percent in equities. Between 2000 and 2010, the equity portion peaked at 67 percent, he said.

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The two investing giants join several other prominent billionaires who have issued similar warnings against participating in the market, among which:

  • Carl Icahn warning that stocks are overvalued, telling CNBC in June that  “I really think now, I look at this market and you just say ‘look at some of these values’ and you have to wonder."
  • George Soros turning bearish, famously derisking his portfolio and buying gold in anticipation of a big downturn after Trump’s election, warning that global markets were in trouble  (a call that has been incorrect so far).
  • Howard Marks warning clients of “too-bullish territory”: in his late July note to clients, the billionaire Oaktree Capital founder warned about the chance of a correction. Amongh many other things, he warned aggressive investors are “engaging in willing risk-taking, funding risky deals and creating risky market conditions” and that this has been a hallmark of past downturns.
  • David Tepper saying he is “on guard”, and while the Appaloosa Management head isn’t short yet, he is far less bullish than just several months ago. He has even suggested wary investors put some money in cash if they don’t like the frothy valuations on Wall Street right now. Tepper was particularly concerned about central-bank intervention over the last several years distorting bond markets and how that is influencing stocks.
  • Paul Singer warning about an ETF crisis: the Elliott Management founder warned in his latest letter to investors and on CNBC that passive funds could lead to a marketwide sell-off: “at one point you will not have the active end in the market to stabilize it. You would have just the passive guys getting into herd mentality." In other words, once sentiment turns, it will be dramatic.

Meanwhile, with the threat of nuclear war breathing down the market's neck, the S&P is down 0.1%.


peepsterC Wed, 08/09/2017 - 14:38 Permalink

This smells of a rat. Why did we not know this earlier. Someone needs to email SHEPWAVE and get the inside scoop here. This may be the sign we are looking for in top.

rp2016 Wed, 08/09/2017 - 14:42 Permalink

i know what all you Lords are trying to do.... everything is clear.... I will stay where I am ... I will watch you dance and run .. ZH, you do you plan to do? Your simple news business is now in the middle of a battle ground? 

pizdowitz Wed, 08/09/2017 - 15:01 Permalink

Did not know where to put this. Here is good as anyYou should be by now out of longs in the market.  Go long tax-free municipal bonds, and short the FANGS and other fluff at leisure.Will let you know when to reverse the positions.

tropicthunder Wed, 08/09/2017 - 15:17 Permalink

I would be more worried if all these dooshbags were bullish. Since they are foaming at the mouth bearish, I say we continue higher.Anyways, only a fucking shill would tell you to sell your stocks. Anyone with half a brain should just hedge your portfolio with puts, gold and treasuries.

Charles Offdensen Wed, 08/09/2017 - 15:51 Permalink

OT-can someone ease explain why we haven't read about the "surge" in gold or silver today at the hedge? Quite curious is it not? Especially with all the gloom and doom events as of late.
You may resume your regular programming as it were. Thank you. That at is all.

For he record I tried!!!

RedBaron616 Wed, 08/09/2017 - 16:21 Permalink

I have always felt like T. Rowe Price knew the business as well as any of the large mutual funds. This just confirms it to me. If I ever go back to mutual funds, T. Rowe Price would be the one I looked at first.