One of the key insights you learn about market behaviour is that it's constantly evolving because of the changing mix of participants. Successive bull and bear markets tend to rhyme, but they never behave quite the same. This is what makes the prediction of market direction so difficult. Anticipating the turn of the market and predicting how long an uptrend of downtrend will last is a "finger-up-in-the-air guess" at best because you're trying to gauge the collective behaviour of a heterogeneous mix of market participants. That mix will change from year to year. New generations of investors join the market, older generations exit, different investing and trading styles come in and out of vogue. Even the different types of institutions (hedge funds, institutional funds, pension funds, endowments) exert varying influence on the market at different times.
It appears that algorithmic Quant funds have been a key factor behind the resilience of the market year-to-date. These rule-based systematic strategies have been piling into the market while discretionary human fund managers have largely been sitting on the sidelines (missing out).
The key points of the article:
- "some algorithmically driven hedge funds have been buying stocks at one of the fastest rates in a decade, according to bank trading desks."
- "the trend among quant funds helps to explain why the US stock market has proven surprisingly resilient this year despite the widespread pessimism, with the S&P 500 gaining 8 per cent year to date."
- "Separate analysis by Deutsche Bank showed overall equities positioning across systematic funds is at its highest level since December 2021."
- "Low exposure to stocks has contributed to poor performance among many investors. Two-thirds of actively managed mutual funds failed to beat their benchmark in the first quarter as portfolio managers were caught off guard by the rally, according to Bank of America."
- "with quants now approaching normal levels of equity allocation, their impact may soften going forward."