Investors grow wary as stocks hit new highs

Investors are girding their portfolios for potential stock market volatility, even as equities hover near fresh highs after logging seven straight months of gains.

Utilities are the S&P 500's best-performing sector so far this quarter with a 10.2 per cent gain. They have been followed by other popular destinations for nervous investors, including real estate and healthcare.

In derivatives markets, the gap in price between the front month Cboe Volatility Index futures contract and the VIX index itself is higher than it has been about 85 per cent of the time over the last five years.

This suggests some investors expect the calm in stocks to give way to more pronounced price swings in the coming weeks and months.

Meanwhile, the Japanese yen and Swiss franc - viewed as havens during uncertain times - have outperformed most G10 currencies this quarter. "It's been a year of positive market returns, but it's a bull market which has pretty defensive undertones," said Saira Malik, head of global equities at money manager Nuveen Investments.

The demand for downside protection illustrates a conundrum that has bedeviled investors at various times during the market's post-pandemic surge.

Ultra-low yields on fixed income have left few alternatives to equities, and betting against stocks has been a disastrous strategy in the last year-and-a-half.

Stocks demonstrated their resilience on Friday, when the S&P appeared to shrug off a big miss on August US employment data, as some market participants bet a weaker economy could undercut the case for the Federal Reserve to unwind its market-supportive easy money policies in coming months.

 The benchmark index is up nearly 21 per cent this year.

At the same time, many have grown antsy in a market that has gone 292 calendar days without a decline of 5 per cent or more, nearly three times the average since World War II, according to data from CFRA's Sam Stovall. Rising valuations, ebbing economic growth and signs of speculative excess have only added to their concerns.

"It's been a wonderful ride for US equities ... but moving forward we think it is going to be a little bit of a different picture," said David Grecsek, managing director in investment strategy and research and partner at Aspiriant, which manages about $14.5 billion.

Concerns over equity valuations have prompted Grecsek to take profits in some of his equity positions and shift some money into non-US stocks, including emerging markets.