Investors clinging to the S&P 500 aren't safe and should get out of crowded trades and into other areas like small caps, Bank of America's top stock strategist says
Investors clinging onto the S&P 500 aren’t safe, according to BofA’s Savita Subramanian.
The benchmark stock index is overcrowded, and any selling could spark more pain for investors.
She encouraged investors to allocate more funds into overlooked areas of the market, like energy and small cap stocks.
Investors clinging to the benchmark S&P 500 shouldn’t get comfortable, and they need to get out of overcrowded stocks before mass selling drives more pain, according to Bank of America’s chief stock strategist Savita Subramanian.
“Everyone is talking about this recession, we’ve got the most telegraphed recession in the history of mankind coming up, and the problem is everyone is using muscle memory to go back into what they think of as the safest equity market, which is the S&P 500. Trouble is, if everybody is in the S&P 500, and they’re all selling at the same time, the S&P isn’t really that safe,” Subramanian said in an interview with Bloomberg on Wednesday.
Put these 20 books on your Christmas wishlist if you want to understand investing and conquer bear markets, according to top Wall Street experts
1. “The Big Short: Inside the Doomsday Machine” by Michael Lewis
2. “Stocks for the Long Run: The Definitive Guide to Financial Market Returns & Long-Term Investment Strategies” by Jeremy Siegel
3. “When Genius Failed: The Rise and Fall of Long-Term Capital Management” by Roger Lowenstein
4. “Reminiscences of a Stock Operator” by Edwin Lefèvre
5. “Market Wizards: Interviews with Top Traders” by Jack D. Schwager
6. “Lords of Finance: The Bankers Who Broke the World” by Liaquat Ahamed
7. “The Asian Financial Crisis 1995-98: Birth of the Age of Debt” by Russell Napier
8. “The Black Swan: The Impact of the Highly Improbable” by Nassim Taleb
9. “A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing” by Burton Malkiel
10. “Anatomy of the Bear: Lessons from Wall Street’s Four Great Bottoms” by Russell Napier
11. “Manias, Panics, and Crashes: A History of Financial Crises” by Charles P. Kindleberger
12. “Debt: The First 5,000 Years” by David Graeber
13. “Stabilizing an Unstable Economy” by Hyman Minsky
14. “Triumph of the Optimists: 101 Years of Global Investment Returns” by Elroy Dimson, Mike Staunton, and Paul Marsh
15. “A Short History of Financial Euphoria” by John Kenneth Galbraith
16. “Too Big To Fail” by Andrew Ross Sorkin
17. “Irrational Exuberance” by Robert J. Shiller
18. “Boom and Bust: A Global History of Financial Bubbles” by John D. Turner and William Quinn
19. “Extraordinary Popular Delusions and the Madness of Crowds” by Charles MacKay
20. “The Dow Jones-Irwin Guide to Modern Portfolio Theory” by Robert Hagin
21/21 SLIDES
Last year was dismal for stocks, with the S&P 500 losing 20% as the Fed jacked up interest rates and battled sky-high inflation. Market bulls are optimistic that the Fed could ease up on rate hikes this year and give stocks more room to breathe, but the Fed changing policy unlikely, Subramanian previously said, warning investors of a volatile January.
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But investors seeking shelter in the S&P 500 will only worsen the volatility, Subramanian warned, as are investors who are sticking to overcrowded sectors of the market like technology. She pointed instead to areas like energy and small cap stocks, which are relatively less crowded compared to the S&P 500 and could be a safer bet.
“That’s really an area where you can get exposure to equities without the risk of everybody being crowded into the same index,” she added.
Subramanian predicted that a recession will cause the S&P 500 to plunge another 24% in the first half of the year, though the benchmark index would overall see flat returns in 2023. Other Wall Street analysts have also predicted a 20% drop in the first half, which could be a major buying opportunity for investors, Subramanian said.