Analysis-Fading risks, fear of missing out may fuel US stocks after near 20% rally By Reuters

By Lewis Krauskopf

NEW YORK (Reuters) – Worries that have dogged U.S. stocks for months are fading, pushing some Wall Street firms to raise their outlooks for equities and beckoning investors who have remained on the sidelines.

Signs of strength in the economy, relief over a deal to raise the U.S. debt ceiling and an interest rate hiking cycle that may be nearing its end have heartened investors and driven the benchmark up nearly 20% from its October low – one definition of a bull market.

Further gains may hinge on whether investors who cut stock allocations to the bone over the last year return to the market. Cash on the sidelines is plentiful: U.S. money market fund assets hit a new record of $5.8 trillion last month, while cash levels among global fund managers remain high relative to history, according to the latest survey from BofA Global Research.

And while computer-driven strategies have been piling into the market for months, according to Deutsche Bank (ETR:), positioning among discretionary investors — a cohort that includes everyone from active mutual funds to retail investors — is lighter than it has been 74% of the time since 2010, the bank’s data showed.

“There certainly seems to be a bit of a more optimistic ring to the market,” said Chuck Carlson, chief executive officer at Horizon Investment Services. “Further strength might beget further strength because of the FOMO factor,” he added, using the popular acronym for “fear of missing out.”

DISSIPATING RISKS

A stronger-than-expected U.S. economy is one reason for investor optimism, after many spent months girding for a widely expected recession.

Data on Friday showed U.S. job growth accelerated in May, even as the unemployment rate rose to a seven-month high – bolstering the case for those betting the Fed can contain inflation without badly damaging growth.

“Inflation has clearly subsided, and yet labor market strength has remained intact,” wrote BMO Capital Markets chief investment strategist Brian Belski in a recent note. While a severe recession was his biggest worry at the start of the year, now “the anticipated recipe for disaster is simply not present.” BMO raised its year-end S&P 500 price target to 4,550 from 4,300. The index, which is up 11% year-to-date, closed at 4,267.52 on Wednesday. It is up 19.3% since…