Daily Capital

August Market Recap: Beware of Concentration Risk

Craig Birk, Personal Capital’s Chief Investment Officer, recaps the major market-moving events and news from August 2020.

Global equities advanced in August, fueled by accommodative talk from the Fed and an increased sentiment shift away from fear and toward fear of missing out.

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COVID-19 Continues to Impact the U.S. Economy

Within the U.S., spread of COVID-19 varied by region, expanding rapidly in some areas while receding in others. Overall, new daily cases moderated from about 70,000 in the beginning of the month to about 40,000 at the end. Vaccine news continues to be mostly encouraging, but more investors seem to be coming to grips with the idea that the virus will be a part of life for some time to come. Amid countless shutdown rules and partial re-openings, new jobless claims moderated in August but remain at levels that would have been unthinkable at the beginning of the year. The overall unemployment level is now 8.4%.

Will the Upcoming Election Bring Back Market Volatility?

With the election just two short months away, many are bracing for volatility. With the outcome likely to go either way, an immediate market reaction can be expected, but we note that the market has not been reacting strongly to swings in the polls and does not seem to have significant preference for either candidate or party.

The Tech Stock Rally and Concentration Risk

August marked the month, in our view, when enthusiasm for a narrow band of growth and tech stocks pushed beyond reasonable fundamental justification and into speculative bubble territory. While most of the market slowly slogged higher, a select basket of stocks rose consistently and sharply throughout the month, often experiencing significant jumps on little or no news. This suggests buying was based primarily on little more than a belief that someone else would pay a higher price later.

At month-end, the ten biggest stocks accounted for over 30% of the S&P 500, nearly double the average from the last 40 years. In a pandemic world featuring heightened uncertainty, we believe the risks of concentrated portfolios are the highest since 1999. Fund managers and professional asset allocators are no less subject to the emotions of fear and greed, but it is often the individual who ends up veering furthest from the investing principles they claim.

What’s Next?

The events in August underscore the importance of having a well-diversified portfolio. The biggest opportunities for diversified approaches arise when most investors focus on one slice of the market while most companies remain overlooked and ignored.

In the near term, the path out of the pandemic, for the market overall, and for the huge imbalances within the market remain impossible to predict.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Craig Birk leads the Personal Capital Advisors Investment Committee and serves as Chief Investment Officer. His focus is translating improvements in technology into better financial lives. Craig has been widely quoted in the Wall Street Journal, Bloomberg, CNN Money, the Washington Post and elsewhere. Prior to Personal Capital Advisors, he was a leader within the portfolio management team at Fisher Investments, helping assets under management grow from $1.5 billion to over $40 billion. Craig graduated from the University of California at San Diego and has earned the Certified Financial Planner® designation.

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