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Daily Capital

Capital Markets Review & Commentary: US Stocks Have a Good Month, But Proper Diversification Remains Crucial

For capital markets, August was all about America. US stocks were up, the US dollar was up, and just about everything international was down. The divergence was driven by superior domestic earnings growth, upward US GDP revisions, escalating trade conflicts and sector composition differences. Currency meltdowns in Argentina and Turkey along with trade war rhetoric with China spurred selling across emerging markets, which fared worst.

Market conditions have created an environment of increased temptation for investors to make the classic mistake of chasing whatever is hot. For the year, returns have been isolated to US stocks and concentrated within a narrow group. Apple, Amazon, Netflix, Microsoft and Google alone represent about 40% of gains in the S&P 500 this year. In August, Apple and Amazon alone added over $300 billion in valuation, an unprecedented move. New investment flows are being largely defaulted into a narrow group of stocks, a pattern that we view as common in the later stages of a large, theme-driven sector or style cycle.

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Asset classes, regions, styles and sectors are cyclical. Disciplined investors who remain diversified and rebalance have better prospects over full market cycles than buy and hold approaches and, more importantly, avoid the risk of carnage that comes from an inability to resist adding to positions after they have already spiked. We seek a diversified portfolio throughout market cycles, but it becomes especially important in the later phases when gains become more concentrated among fewer assets. From a valuation perspective, international and value stocks are increasingly attractive on a relative basis. We expect rewards from owning them in the years to come. It is easy to buy what has been hot and hard to own what is not, but history has proven again and again that what feels most comfortable doesn’t often end up being most profitable.

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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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