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Market Recap and Comments
Stocks (SPY) finished the week up 0.8% after dropping as much as 1.7%. Commodities (DBC) gained 2.8% after rising as much as 3.4%. Gold (GLD) was down 0.2%. Bonds (TLT) plunged 2.4%. DBC is up the most (+43%) year-to-date while TLT is down the most (-9%.)
The rally in commodities continued while bonds were down and stocks recovered from a loss.
Last week I wrote:
Investors are turning cautious but it appears some funds are selling lower volatility stocks while adding to their high beta positions. This is the reverse of what occurred before and during the dot com bear market.
Low volatility large caps received more inflows this week versus high beta large caps as uncertainty is on the rise about the economy due to supply and labor shortages caused by the pandemic. A number of fund managers we track have turned bearish. However, as I wrote last week, biggest consolidation coming will probably be in the fund management industry.
In my opinion, the biggest consolidation that’s coming isn’t in stock market because after all as long as the economy maintains its key advantages markets will recover at some point. The biggest consolidation will occur in the fund management industry.
Passive investors can wait for recovery and even add to exposure after a large drawdown. But some strategic allocation managers are under pressure to deliver every quarter otherwise they face redemptions. This is an advantage of retail and passive investors as they can profit from the losses of some of those fund managers who speculate on allocations that will outperform the market during a large correction. For example, an unexpected correlation of assumed uncorrelated markets, or strategies, can lead to significant losses during a market decline and this is actually what occurred during 2008. Without proper timing it’s hard to avoid large losses and this is a serious issue with strategic fund managers who avoid timing due to, among other things, the negative publicity it has received.
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