To The Moon

Stock Market Volatility Is Rising: Here's Where Pros Are Trimming Their Positions

The $S&P 500(.SPX)$   is having a monster year. The benchmark is up 22% so far in 2024. And at more than 22 times forward earnings, the S&P is trading well above its long-term average of 15.7.

The question for investors now is whether to trust the momentum will continue or to look for opportunities to take profits. Based on conversations with several investment advisors, there isn't a lot of trimming going on outside of regular rebalancing, but there are still some tactical adjustments being made. For this week's Big Q, we asked advisors: Where are you taking profits?

Chris Grisanti, chief equity strategist and senior portfolio manager, MAI Capital Management: I would lighten up on interest rate-sensitive stocks here or bond proxies like utilities or like real estate. Since July 10, the worst two sectors have been information technology and communications; in fact those are the only two sectors that are actually down. That's weird, especially compared with the last couple of years. And utilities and real estate have been the best sectors in the market for the last three months. But I think the past three months has been an aberration rather than the start of a new trend. With the Fed expected to continue to lower interest rates on the short end, I think this is a good opportunity to trim them.

I'd say the market is fully valued, but valuation has never been a short-term indicator of a peak.

I actually don't think that the communications and technology roller coaster ride is over. I think they will come back to lead the market, and that we're in the middle innings and not the eighth inning of that rally. I'm old enough to have managed money through the late-'90s internet boom, and I can say Microsoft has gotten expensive, but it's cheaper than it was a couple of years ago, and it's only as expensive as it was in 1997. So it's got some room to go before it gets really expensive.

Adam Phillips, managing director of investments, EP Wealth Advisors: We've been trimming gradually from consumer discretionary. Obviously the consumer has remained strong, and we've seen discretionary outperform consumer staples, which I think is a sign of broader market strength. But we expect the labor market to continue to moderate, and with that goes consumer spending. So that's an area that we have lightened up on of late. We've also trimmed our energy exposure within our large-cap portfolio. Energy is going to be an interesting area coming out of the election with regards to potential policy changes, and we still have a modest overweight. But we are trimming there because we are a little nervous about, not so much the supply side but the demand side. We need certain things to go right, China being one of them with their recent stimulus measures actually turning into action and consumption by those within the economy.

For the most part, we aren't making a whole lot of changes right now at the sector level.

We are trimming from those handful of areas and looking to add to others. Industrials, for instance, is an area that we think is important to watch with everything going on in the world, specifically around defense. But the elections are coming up fast. We're watching things play out in the Middle East. We're watching news around potential regulation of the tech giants. We're watching policy rates, and earnings season is just now getting under way. So we want to wait and see how some of these things play out before moving the portfolio.

Sevasti Balafas, CEO, GoalVest Advisory: Yes the market is richly priced, although it is a favorable environment. I think the Federal Reserve will continue their interest rate cutting path. And I think earnings in the next 12 months will be pretty strong. And it has been a stable economy. As a result, we're not selling off and going to cash or fixed income. We are doing rebalancing: We are selling some of our equity exposure and going into private markets and private credit. But we're not necessarily selling because we think it's too expensive.

If I were to get a little bit deeper, Google and $Microsoft(MSFT)$   are a couple of the large-cap tech names that we own. They have pulled back from their highs, so I don't think it's a great time to be selling them -- because again, I do think projections are positive. Other stocks like Facebook and $NVIDIA Corp(NVDA)$  , yes, those have run up and do seem pretty richly priced. And we're rebalancing those, but we're trimming versus selling. I think valuations are suppressed in private markets. We're still seeing good valuations, not only in private companies, but also in private credit. So that's where we're adding.

Benjamin Wallace, portfolio manager, research director, Grimes and Co.: After our most recent round of reviews we rebalanced some of the higher performing Mag Seven stocks. For example, obviously $Meta Platforms, Inc.(META)$   has done quite well, and in that situation we're rebalancing it back down to model weights, not necessarily selling it outright.

And one trend has been that while the overall market seems like it's moving steadily forward, we're seeing a lot of volatility below the surface. A lot of stocks will move in and out of favor very quickly. So we're trying to take advantage of that. There have been notable moves in stocks that we might have been buying or selling three to six months ago. So we've trimmed $Paychex(PAYX)$   and $PayPal(PYPL)$  , which are obviously similar names that have both moved up. Again, we're mostly just trying to rebalance back to model weights at this point.

At the start of the year we sold Lululemon. It wasn't that we had any great insight or anything, but the stock had moved up strongly on being added to the S&P 500 and it had gotten a little bit ahead of itself. Now we find ourselves putting it back into portfolios. It's an example of a stock that had moved a little bit too far one direction, and now I think has gone a little bit too far the other direction. You're seeing a lot of these types of moves in equities.

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