There was a time, long gone, when investors could diversify their risk by owning several asset classes, like stocks, bonds and commodities. They could rest assured that if one asset class went down it would be compensated by other asset classes. This strategy worked well for decades mostly because the players and investors into these different asset classes were different groups of people whose risk appetite was driven by different factors.
But that has changed over the past few years and in my opinion this is a permanent change. The main reason for this is the massive money printing which has created a mountain of cash chasing very few investment opportunities. A lot of this mountain of cash sits with the large institutional investors like pension funds, sovereign funds, banks and extremely high net worth individuals. These investors have access to every single asset class, geographical markets and the entire spectrum of opportunities, ranging from the plain vanilla to the very exotic.
When these large investors feel that the market conditions are sanguine they flood all the asset classes with money. They need to do this as no single asset class and no single geographical market can absorb the loads of cash sitting around. The move by one large investor is usually followed by the other large investors, which creates a tsunami of cash flowing into the markets. This results in all asset classes rising in unison, creating what is now termed as a "risk-on" market environment.
Conversely, when the market conditions are adverse, due to poor economic data, geopolitical tensions or structural issues, it results in the large investors pulling their cash from not just one, but all asset classes and going into the relative safety of the US Treasury bonds which are regarded as the safe haven of choice for all global investors. This is called a "risk-off" market environment.
Furthermore, what we have seen of late is that the uncertainty in the markets has resulted in the disappearance of long lasting trends. The long lasting trends of yesteryear have been replaced by short lived volatile swings in asset classes as the markets swing between risk-on and risk-off states. These phases last on average around 6 to 8 weeks at most with most of the market movements coming in the first week or two. By the time most investors realize that we are in a risk-on or risk-off phase, most of the market movements have already taken place, leading to buying high and selling low frustrations.
The key to making money still remains in not following the herd, but in anticipating when these risk-on and risk-off phases will switch and positioning for them. This also means that the accuracy of picking the tops and bottoms is going to be severely diminished and most investors will have to settle for capturing a small fraction of these market moves.
As the global central banks keep printing more money, the worse this problem will become, making it harder and harder for the buy and hold investor to prosper.
But one thing is for sure, we are about be hit with mountains of more global money printing. A lot of this will be from China and the Europe in the next few months, as they become proactive in fighting faltering economic growth.
This tsunami of cash should bring about the next phase of a 'risk-on' environment which will benefit stocks but more so commodities. I like gold and silver in this environment.