WHILE it’s not clear that the stock market lows of March 9 were the end of the bear market, one thing is certain: Investors have a whole new take on risk.
After spending most of 2008 and the first quarter of this year fleeing from volatile areas of the market, investors are now racing toward them. A newly released survey by Russell Investments, taken at the end of May, shows that money managers are most bullish on emerging-market stocks.
Just three months earlier — and before the start of the rally that sent emerging-market shares soaring more than 60 percent — a version of the survey found that investors favored staid fixed-income investments, specifically high-quality corporate bonds.
“The risk switch seems to have gone from full off to full on, with no in-between,” said Mark Eibel, director of Russell’s client investment strategies group.
As concerns about the economy’s health have ebbed, the common perception of risk has changed drastically, worrying some financial planners.
Last year, after taking big losses, investors often fretted about the real possibility of losing capital invested in stocks.
Today, investors are rushing back into them — nearly $40 billion of new money has poured into stock funds since the end of March — and are acting as if their biggest risk is being left behind by a rebounding market.
“It’s the opposite of panic selling — it’s panic buying,” said Greg Schultz, a principal at Asset Allocation Advisors, a financial planning firm in Walnut Creek, Calif.
The fear is that they’ll miss out on an opportunity to quickly make back last year’s losses, especially if it turns out that the economy is really improving and an enduring bull market has begun.
But what if the underlying assumption that has driven this rally — that the economy is on the mend and that a recovery will occur by year-end — is wrong? What if the economy takes longer to heal?
For now, though, many investors are counting on a robust recovery.
“That’s the bet,” Mr. Eibel said.
He noted that the Russell survey found that professional investors were favoring economically sensitive market sectors, while shifting out of defensive areas like consumer staples.
“Managers are now positioning their portfolios to take advantage of an economy that’s set to grow,” he said.
But if investors don’t see confirmation in the coming data — for instance, if economic reports point to further troubles in the housing market — “it’s not going to take much for them to start selling off,” he said.
In fact, there is a growing sense among economists and market watchers that investors have moved stock prices far ahead of the economic fundamentals.
In a recent report, Stephen Biggar, director of global equity research at Standard & Poor’s, noted that in a recovery, stocks typically anticipate how the economy is likely to be faring six months down the road. Today, he wrote, “the market is already discounting the level of improvement we likely won’t see until mid- to late 2010.”
Yet Mr. Biggar warned that there is a strong possibility that the economic rebound would be hindered by slow job creation, continued weakness in housing, higher interest rates and rising oil prices.
If the economy fails to meet expectations, there is another cause for concern: the possibility that investors who’ve been diving back into the market will be punished a second time — compounding their losses in the recent downturn by buying stocks just before another drop. Then some shellshocked investors will sell at a loss.
Buying and selling at the wrong time is a common hazard in markets that shift gears so quickly, as this one did back in March.
Lately, there has been much buying of the flavor of the month — the previous month, that is.
“In March, it was high-quality bonds; now its emerging-markets stocks,” Mr. Schultz said. “You can buy what did well just recently, but you have to remember that that doesn’t get you any of the profits those investments have already rung up.”
Mike Scarborough, the president of Scarborough Capital Management, an investment advisory service in Annapolis, Md., warns that even if this rally is real, history shows that recoveries don’t send stock prices straight up.
Typically after a bear market, some investors begin to question the sustainability of the initial surge and sell into the rally. This can push prices back down, and make the market “retest” its lows.
This happened after the bear market in October 2002. After an initial post-bear run-up that lifted stock prices more than 21 percent, the S.& P. 500-stock index fell 15 percent from Nov. 27, 2002, to March 11, 2003.
MR. SCARBOROUGH says he is concerned that investors now rushing into the market are likely to exit once the market retests its lows.
“The risk you run, going from abject fear over to greed so quickly, is that you’ll run into a huge whipsaw,” he said. “That’s the very reason why you’re supposed to have a disciplined asset-allocation plan in place,” where you commit a certain percentage of your portfolio to stocks and a certain percentage to bonds at all times — regardless of market conditions.
Unfortunately, Mr. Scarborough said, “just as the sun rises and sets, people are going to chase returns.”
Paul J. Lim is a senior editor at Money magazine. E-mail: fund@nytimes.com.
