A move by investors to prefer safety trades as a way of insulating themselves from volatility could ultimately see them burn, says CNBC.
According to PNC’s Jeffrey Mills, jitters are driving investors into less profitable or worse — losing — areas of the market. He says that investors may be inclined to do drastic things in portfolios to insulate themselves from higher volatility when in fact the backdrop would portend the exact opposite.
“It’s key to understand that the call for higher volatility doesn’t have to be a call for poor market performance,” Mills said.
This comes at a time when recently the Investment Company Institute showed how the investors yanked the most money out of U.S. stocks in February since the 2008 financial crisis. The data suggest market participants are getting increasingly nervous amid whipsaw action in stocks.
“Investors and real humans, in general, have this inclination to try to make themselves feel safer,” Mills said. “I think about folks who are afraid to fly. They actually choose to drive even though driving is exponentially more dangerous.”
Mills contends economic fundamentals and solid earnings will push stocks higher this year even though valuations remain elevated — adding it’s the wrong time to get majorly defensive.
Currently, Mills favours financials, energy and technology stocks. He notes that all of us like tech and although many don’t think valuations are as extended as maybe some would think given the run.
“If you look at the percentage of companies in the tech sector above their 200-day moving average, it’s actually some of the best breadths we see across sectors,” states Mills.
He cited areas, such fixed income and cash, as sectors that could burn investors with poor returns in the coming months, when compared to stocks.