Markets Favoring Risk Assets Right Now

by: Roger Nusbaum

A few weeks ago I shared an opinion (or hunch if you prefer) that I thought the U.S. market was going to be in for a range-busting rally that I think will then retrace. It is too early at this point to know whether this is yet correct or incorrect but I have made an observation that I hope is useful, even if not original.

If you've been reading this site for a while you may be familiar with my preference for owning stocks with all different types of attributes, I think it makes for better diversification. The stocks at the riskier or more volatile end of the spectrum are up a lot of late. This is not a comment about what we own, but about the recent performance of things like emerging markets, some tech, some financials (we do not own U.S. banks but they are on a good run), some materials, some energy and some industrials.

Again, although not an original thought, when these types of areas outperform for a while, like now, it is often a sign of some sort of confidence being expressed. This can last for a while- like several months and many percentage points. As a bit of a contrarian nugget, it seems like many pundits were looking for a lift in the second half of the year and one outcome of that consensus being wrong is that the lift comes in the first half. Another contrarian outcome, of course, would be no lift- that the market in fact drops instead.

For all I know this run could, of course, end today. But I think there is merit in assessing the current mentality of the market because occasionally you will make a change in the portfolio on this.

Short post, busy week.