During these past two months the headline fear that possessed nearly every class of investor caused an irrationality in decision making that has created a misallocation in assets into riskless propositions, such as fixed income and cash. The type of misallocation we have experienced must be corrected, especially as we enter a seasonably favorable period during which a vast majority of portfolio managers are greatly underperforming their respective benchmark.
These portfolio managers possess the same tendency towards self-preservation and procreation that all of us do. As a result they desire employment from which they can derive the various necessities to facilitate self-preservation and procreation. This wide-sweeping generality very simply equates to a portfolio manager class that will be interested in proving their worth to investors by creating a portfolio that, at the very least, attempts to emulate the S&P 500. Very simply put, investors will be taking on more risk through equity exposure into year end.
These swash buckling captains of mediocrity are now coming face to face with the stark reality of deceit at the hands of the market. What they saw just one month ago doesn't at all match what they are opening their eyes to today.
One month ago we didn't know about the future of Fed policy.
One month ago we thought commodities and emerging markets were on a hand basket to hell.
One month ago technology and financial earnings were being questioned incessantly.
One month ago we thought Chinese woes would engulf developed economies in flames.
All headline fears that have created the wall of worry necessary for the next upleg of the bull market to get underway.
The reality of the situation one month later is that commodity prices have stabilized. Emerging markets are now surging. Technology is being led by its greatest tandem: The SOX (Semiconductor Index) and key technology leaders, such as Google, Amazon and Facebook. Major financials are virtually riskless propositions as earnings begin to shed light on the sector. The Fed is no longer a threat due to the recent jobs report. All the meanwhile, interest rates have fallen and continue to remain low.
The inevitability of every semi-competent asset manager that is interested in self-preservation realizing that they have very simply been played over the past couple months has no other outcome but to cause a surge in equity prices as these asset managers correct their errors.
