The recent rally in stocks is higher on the disbelief scale than even the post-GFC rally that lasted over a decade.

Salvatore J. Bruno, Chief Investment Officer and Managing Director, IndexIQ, makes the interesting point that it is hard to predict how markets will behave around a significant inflection point. Writing in ETF Trends he observes that, as usual, markets were ahead of the curve and discounting an economic recovery that was invisible to economists and analysts.

As this is being written, the S&P 500 is up nearly 45% from its COVID-triggered low of 2190.

“This dramatic upward move in equities appeared to be non-intuitive, taking place in the face of a lot of historically bad data,” says Bruno.

And then, the May jobs numbers proved all the doomsayers wrong. Jobs were up 2.5 million against expectations of a decline of 7.5 million.

But equities were rebounding from as early as March 24. And pundits were still doubting its legs.

Markets wrong-foot the experts

“The point we consistently make here is not that any given rally (or selloff) is, or isn’t, rational; markets often go their own way, disconnected from the economy for periods of time,” writes Bruno. “Rather, it’s that the timing of these things is impossible to predict.”

Therefore, trying to time the markets is usually counter-productive for most investors.

Besides, the current macro-economic environment faces unprecedented events. These include the virus outbreak, the resultant economic damage, and the record stimulus measures undertaken by governments and central banks around the world.

This is, therefore, wholly uncharted territory.

Advice to investors

“What has been demonstrated to work is diversification, and a long-term focus,” according to Bruno. However, even a diversified and long-focus investor can be shaken out in the face of “extreme circumstances and high levels of volatility.”

(The global pandemic brought both).

Liquid alternatives, on the other hand, can provide a measure of stability in an investor’s portfolio at such times.

IQ Hedge Multi-Strategy Tracker (QAI)

According to Bruno, the IQ Hedge Multi-Strategy Tracker (QAI) provides useful diversification and non-correlated asset class exposure through various sub-strategies. These include Macro, Long/Short, Fixed-Income Arbitrage, and Emerging Markets.

“This can help dampen volatility during periods of market stress while providing continued exposure to both stocks and bonds,” advises Bruno.

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