Signs of a 5% correction on the horizon?

The U.S. stock rally that has extended over the past year is due for a correction of more than 5%, warned investment strategists at T. Rowe Price Group Inc. That doesn’t mean it’s a time for advisers to stick their heads in the sand, but to proceed with caution.

“Our green light is turning decidedly yellow,” John Linehan, the company’s head of U.S. equity, said Thursday at a press briefing in New York.

His view is less sanguine than that of other investment firms. A portfolio manager at Neuberger Berman recently advised investors to stay bullish on U.S. investments, saying they’re bound to go higher and the first half of the year will surprise the market.

T. Rowe Price remains optimistic on the market, but in a more muted way. Mr. Linehan said he expects continued U.S. economic growth in 2014 but that potential head winds include decreased asset purchases by the Federal Reserve and monetary policy uncertainty.

“We’re still optimistic on the market, but not as aggressively so as in the past,” Mr. Linehan said. “We’re starting to see signs of caution.”

These invest-with-caution sentiments were shared by Bill Gross in his most recent commentary for Pacific Investment Management Co., where he is co-chief investment officer. Investors are likely to start fleeing from historical asset classes due to low risk-reward returns, he said, referencing “the perilous future potential of market movements.”

“Investors are all playing the same dangerous game that depends on a near-perpetual policy of cheap financing and artificially low interest rates in a desperate gamble to promote growth,” Mr. Gross wrote in his December column.

This year, U.S. aggregate bonds are on track to yield negative returns for only the third time since 1980. As that occurs, liquidity continues to be a challenge for investors and “duration” has become a dirty word, said Mike Gitlin, T. Rowe Price’s head of fixed income. He labeled the rotation out of bonds into stocks “good,” but not great.

In addition, tapering from the Federal Reserve “is going to happen even if GDP growth is a little less than expected,” Mr. Gitlin said, referring to the central bank’s plan eventually to ease back on its aggressive bond-buying program. “It’s about time.”

Bill Stromberg, T. Rowe Price’s head of equity, said he advises investors in the coming year to re-balance, stick to their long-term investment plan and wait for things to happen. At 57 months, the current bull market is right at the average length of those that have occurred since the 1920s. With that in mind, investors should be cautious in 2014.

“There are signs of speculation out there,” Mr. Stromberg said.