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Stock Hedges Soar on Fear of Market Plunge

Fund managers have increased their hedging activity at the
fastest pace in 14 months, according to a long-running survey
conducted by Bank of America Merrill Lynch, as reported by Bloomberg. A net 73% of
respondents indicate that they have taken out protection
against the possibility of a sharp drop in the equity markets
during the next three months, and their underweight positions
in U.S. equities are at a ten-year high. This iteration of the
survey was conducted between September 1 and 7, among managers
who oversee a combined $629 billion of assets.

A particularly dire warning was issued recently by Wall Street
analyst and fund manager John P. Hussman, who foresees stocks
plummeting 60%. He sees widespread overvaluation, across all
components and subsets of the S&P 500 Index. (For more, see
also: S&P
500 Could Fall 60%: Hussman
.)

Source: Bank of America Merrill Lynch, Bloomberg

More Reasons for Concern

Hussman is far from alone in his warnings about broad-based
overvaluation. Other leading investors, analysts and market
observers agree. One of them, Tom Forester of Forester Capital
Management, adds that the collapse of valuations in one sector
is likely to have a domino effect, dragging down the rest of
the market with it, based on the history of recent market
crashes. If he’s right, that’s cold comfort for investors who
shunned high-flying sectors such as technology. They won’t have
anywhere to hide, Forester warns. (For more, see also:
Bear
Market Ahead: What 5 Big Investors Forecast
.)

The massive and growing debt loads borne by governments,
private businesses, and private individuals are another
widespread concern. Cascading rounds of insolvency could bring
down the markets, not to mention the global financial system
and economy, in a replay of the 2008 Financial Crisis. A
slightly different slant is offered by Alan Greenspan, former
chairman of the Federal Reserve
Board
. He’s more concerned about a huge bond market bubble,
created by unprecedented infusions of liquidity by central
bankers in response to the 2008 crisis. When that bubble
bursts, the economy and the stock market will crater, Greenspan
warns. (For more, see also: Stocks’ Big
Threat Is a Bond Collapse
.)

Another lingering concern, at least for U.S. stock prices, is
that a slow-growing economy is not providing the impetus for
continued robust gains in corporate earnings. Meanwhile,
rebuilding from Hurricanes Harvey and Irma will cause a costly
diversion of economic resources.

Recent nuclear saber-rattling by North Korea also adds to the
uncertainties and worries faced by investors.

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