With the enthusiasm for stocks quite high, the question becomes whether the market rally will continue or if there are risks ahead that could take from profits. ETF Trends’ CEO, Tom Lydon, and Greg Branch, Veritas Financial founder and managing partner, joined CNBC’s “Power Lunch” to discuss the risks they see to the market rally.
As far as whether or not a potentially big risk could lead to retail investors pulling out, Branch explains how that would merely be a consequence. As far as a true risk, it comes down to inflation spiking more acutely than the Fed has said that it’s comfortable with. In the event that this happens, the market will have to plan on the Fed changing its posture sooner than expected.
There are also institutional risks that the assets that have migrated up the risk curve retreat to their more traditional asset classes as those yields get pushed. “I’m not so worried about the retail investor exiting,” Branch adds. “I’m worried about institutional pools of money retreating to their more traditional asset classes away from equity as those yields rise.”
Looking to inflation trades such as commodity exposure, Lydon notes it should be something to have a concern with. Home, lumber, steel prices, and more; are all commodities that are, in general, rising in price quite high. “We really haven’t seen a spike up in commodities like this in the past 6 months,” Lydon adds.
Taking On Commodities
As far as ETFs that can handle a basket of commodities, the Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC) is a great fund to consider. Additionally, small caps are on sale. As Lydon points out, there’s been a large boom with the S&P 500, based on the mega-cap stocks in that index. As a result, small cap stocks and small cap value are on sale. This means it’s possible to get a great discount from a valuation perspective.
Lydon adds, “When this reopening trade happens, these smaller companies are much easier to ramp up. They can hire people quicker. They can ramp up with supplies. And they are in a much better position to take advantage of this reopening trade.”
When looking at those buying into the commodities trade towards the top, Lydon notes that while some commodities are approaching all-time highs, the wild thing is how areas such as gold have remained flat for a long period of time. It comes down to picking the right spots, which includes a number of ETFs that can be geared more towards some specific areas.
The drive in other directions could come from things like the appeal of crypto-currencies, among other things. However, looking at average investors, they have very small allocations toward commodities, which may mean this is the first time in decades that it’s something to consider.
For more market trends, visit ETF Trends.