No.1 threat to U.S. stocks? Money managers offer surprising answer

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 its latest quarterly survey of investment professionals by Russell Investments, respondents ranked European economic issues above all other major threats, with a top ranking of 73%. The next highest ranking threats were financial 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 rear-view mirror at a profoundly significant risk event,” he added. “Now, after a strong run-up in performance, the concern is the risk that may be ahead on the horizon.” The quarterly survey, which was conducted during the last week of May, also found that 47% of respondents characterized the stock market as being undervalued, 44% said it was fairly valued, and 9% said it was overvalued. That compares to March when 28% of respondents said the market was undervalued, and December when 19% said it was undervalued. While the survey results suggest more managers see opportunities, it also shows signs of heightened alert for downside risk, according to Mr. Eibel. “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, survey respondents were most bullish on U.S. large cap growth at 63%, and least bullish on U.S. Treasuries at 12%. By sector, the managers were most bullish on technology at 69%, and least bullish on utilities at 30%.