'There are no obvious opportunities': A Wall Street investment chief managing $23 billion says now is the time to protect returns rather than seek new ones

trader stock market

  • There are fewer opportunities to make money in markets
    today as both stocks and bonds extend rallies, capping further
    upside for current holders and discouraging new
    entrants.
  • Now is the time to focus on not losing money instead of
    making it, according to Bill Zox of Diamond Hill Capital
    Management. 
  • Taking on too much risk in your portfolio could lead to
    losses during market volatility driven by trade or a downturn in
    the future, Zox said.
  • Instead, Zox said to be nimble and consider price to
    reward to prepare for any opportunities volatility may
    bring. 
  • Read
    more on Markets Insider
    .

The old market adage “buy low, sell high” is great advice. But
it becomes more difficult to find bargins when prices are elevated
and continuing to rise.

As the S&P
500
hovers near all-time
highs,
it’s become increasingly difficult for new entrants to
see the kind of returns they might expect in the market. As stock
prices climb, the upside potential for future gains becomes capped.
In addition, a rally in bonds has brought down yields to a point
where investors see little incentive to buy them right now. 

In this type of environment, it’s time to focus on preserving
existing gains, as opposed to making money outright, Bill Zox,
chief investment officer and fixed income portfolio manager at
Diamond Hill Capital Management told Markets Insider in an
interview. 

“There are no obvious opportunities” in
the market,
Zox said. “There were just six months ago in
December, but it’s been a very sharp rebound.”

There are a few reasons why investors find themselves in this
situation, Zox said. First, while it’s generally unusual to see

so-called safe haven assets such as government bonds
rallying
at the same time as equities, their high correlation suggests
they’re drawing different conclusions about the health of the
economy.

On one hand, the bond market rally has been driven by perceived
weak economic data as it prices in
multiple interest rate cuts
from the Federal Reserve this
year. At the same time, however, “the equity market doesn’t seem
concerned about the strength of the economy,” Zox said.

Therefore, as investors look to generate returns, they’re
becoming more and more comfortable with taking on risk assets such
as equities, commodities, high-yield bonds, or currencies.  

But new market highs mean that investors have to take
increasingly risky bets to get returns. Given that the economy is
late in the current recovery cycle, too much risk is a bad idea,
especially in certain parts of the market, said Zox. 

“With where market pricing is, I think the risk in the
high-yield bond market is one to stay out of,” he said. He also
said to be careful with leveraged buyouts and private equity
controlled issuers, especially those held by aggressive private
equity firms. 

It’s not time for these assets because if there is a market
downturn, investors could see big losses and potentially have
difficulty exiting trades with lower liquidity.

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To be sure, Zox isn’t counting on
a recession in the next 18 months
or a sharp downturn anytime
soon. Instead, markets are likely to “meet somewhere in the
middle,” he said, with equities pulling back and treasury yields
rising as it becomes more clear that a recession isn’t on the
horizon.

However, care is still warranted because of the factors that
could and likely will continue to drive volatility, said Zox. One
is
the Fed
. While the central bank has capitulated to the market
since late-December sell-off that nearly derailed the 10-year bull
market, there may be signs on the horizon that they won’t do that
forever.

In the event that the Fed starts trying to walk back market
expectations of a 50-basis-point rate cut before year-end, that
could increase market volatility, Zox said.

Another big volatility driver is trade tension. A key part of
the Fed’s decisionmaking will come from
what happens at the G20 summit this week
. All eyes are on
President Donald J. Trump as he meets with China’s Xi Jinping to
talk trade. If discussions go south and more tariffs are imposed,
that could be a drag on markets and potentially push the US closer
to recession. At a certain point, the Fed will run out of room to
overcorrect for bad policy, Zox said. 

This gives investors all the more reason to hedge bets, stay
nimble, and consider price to reward in investments. Opportunity in
the markets for the next few months is “not going to be in table
pounding ideas,” he said. “It’s going to be something that doesn’t
get you into much trouble until volatility spikes again.”


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'There are no obvious opportunities': A Wall Street investment chief managing billion says now is the time to protect returns rather than seek new ones