No.1 threat to U.S. stocks? Debt crisis in Europe, money managers say

The debt crisis spreading across parts of Europe is seen as the biggest threat to the performance of the U.S. stock market over the next 12 months, according to a survey of professional money managers. In Russell Investments' latest quarterly survey of investment professionals, respondents ranked European economic issues above other major threats, with a ranking of 73%. The next highest-ranking threats were regulatory reform and unemployment, at 53% and 52%, respectively. “After the market cataclysms of 2008, the economic turmoil in Europe has become the first big aftershock,” said Mark Eibel, director of client investment strategies at Russell. “Fifteen months ago, managers believed the markets had withstood a global financial crisis and that they were looking through their rearview mirror at a profoundly significant risk event,” he said. “Now, after a strong run-up in performance, the concern is the risk on the horizon.” In the quarterly survey, which was conducted during the last week of May, 47% of the respondents characterized the stock market as undervalued, 44% said it was fairly valued, and 9% said it was overvalued. That compares with the previous survey, in March, when 28% of the respondents said that the market was undervalued, and December, when 19% said it was undervalued. Although the survey results suggest that more managers see opportunities, it also shows signs of heightened alert for downside risk, Mr. Eibel said. “Managers appear to be holding a risk-on, risk-off switch and swing between loving risk and hating it, changing preferences quickly,” he said. “Managers believe the market is undervalued but want to see consistently strong earnings and improved employment before committing to risk-on.” By asset class, the survey respondents were most bullish on U.S. large-cap-growth stocks at 63% and least bullish on Treasury bonds at 12%. By sector, the managers were most bullish on technology at 69% and least bullish on utilities at 30%. E-mail Jeff Benjamin at [email protected].