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Strategic Insights

Volume 10, Edition 11 | March 22 - March 26, 2021

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Is the Stock Market Rigged?

Doug_Walters Doug Walters | Articles

Read Time: 3:30 min

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A growing number of investors believe that the stock market is rigged, which we believe is leading to risky behavior among investors. Ironically, the excess risk-taking is only perpetuating inequity, helping the rich get richer.

Contributed by Doug Walters , Max Berkovich , Aleksey Marchenko , Frederick Hole

A recent Bankrate survey found that more than half of investors believe the U.S. stock market is rigged. We see this distrust manifesting itself in pockets of excess risk-taking as investors seek ways to “beat the system.” The reality is that the stock market has been very good to patient investors historically, and trying to take shortcuts only feeds the system’s perceived inequity.

We are evidence-based investors, so let’s take a look at the evidence. Over the past 30 years, the stock market is up over 1800%. That is an annual return of over 10%. Not bad for a rigged system, particularly considering this time period includes the Dot Com crash, the 2008 Financial Crisis, and a global pandemic. Any investor who stayed the course, investing consistent amounts over this time period, would have done very well.

Yet, despite the attractiveness of this proposition, we are increasingly seeing investors take unnecessary risks. Take SPACs, for example. A few weeks ago, we discussed these speculative vehicles (The Search for SPAC). These securities, by design, enrich the billionaire private equity firms who issue them, as well as ultra-wealthy celebrities like Shaquille O’Neal, Alex Rodriguez, and Serena Williams, who put their names behind them. But are SPACs rigged? No, because you do not have to invest in them. If I offered you an ordinary dime for the price of 25 cents, would you buy it or call the transaction rigged? No, you would not do it.

Risk abounds these days. Whether it is SPACs, retail squeeze stocks, NFT art, or cryptocurrencies, we see investors unnecessarily add risk to their assets. All of these “investments” have the potential to come crashing down overnight. We have seen this story before. A better approach is patience and regular contributions to a retirement account that owns a diversified mix of investments. Focus on science, not speculation!

Headlines This Week

Banking on it! 

  • On Thursday, the Federal Reserve announced the end of additional capital restrictions on banks, beginning sometime this summer.  
  • This will allow banks to return to paying and growing their dividends, as well as repurchasing their stock.  
  • The SPDR S&P Bank ETF (KBE) is up over 24% year-to-date, helping investors return to value stocks and a move higher in interest rates. 

The Labor Department 

  • Initial unemployment claims were the lowest in a year, at about 684,000 claims last week.  
  • There are still over 18 million Americans on some form of emergency or pandemic assistance. 
  • While unemployment remains elevated, the trend points to a recovery in the labor market. 

The Builder 

  • President Biden’s administration is now focused on delivering an infrastructure bill to “build back better.” 
  • The administration is planning to propose an investment of $3 Trillion in U.S. infrastructure, partially funded by higher taxes on the wealthy.  
  • The rumored infrastructure bill will primarily focus on repairing roads and bridges and reducing emissions by investing in green technology. 
$3 Trillion
The administration is planning to propose an investment of $3 Trillion in U.S. infrastructure, partially funded by higher taxes on the wealthy.  

The Week Ahead

Rebalancing Headwinds for Equities

As the first quarter of 2021 comes to a close next week, markets anticipate the continued rebalancing of pension funds, insurers, and other large investment groups.  

  • Due to the rally in equities combined with the sharp bond sell-off in Q1, funds will be looking to exit their overweight equity positions and reallocate to fixed income. 
  • Bank of America estimates US private pensions alone will need to move around $88bn out of equities to put into bonds.  
  • According to JPMorgan, balanced mutual funds are expected to sell $136bn of equities to buy fixed income.  
  • Due to the risk of any front running by other traders, fund managers tend to be tight-lipped about the timing of their rebalancing.  

Uplifting Data

Next week will see the release of nonfarm payrolls, consumer confidence, and the ISM manufacturing purchasing managers index (PMI) for March. 

  • The consensus forecasts for the March nonfarm payrolls are a jump of 500k jobs, representing a further quickening of the jobs rebound’s pace. 
  • On Thursday, the ISM manufacturing PMI is poised to hit its highest value since 2004, suggesting a solid resurgence in the manufacturing industry.

April Fools’

Keep a close eye out for any unsuspecting pranks next Thursday!  

  • For baseball fans out there, the Major League Baseball season starts on April 1st, with the Yankees playing the Blue Jays in an afternoon game to lead things off. 

Easter Weekend & Passover 

Financial markets and banks will be closed on Friday in observance of Good Friday.  

  • Passover will start on Saturday and go through all next week. Happy Passover!  

About Strategic

Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on client assets over $1.6 billion.

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