High momentum growth stocks, which appeared unstoppable to start the year, ran out of steam in mid-February, experiencing a rapid correction that appears to have stabilized for the moment. Meanwhile, small cap and value stocks shunned for most of 2020 continue to advance steadily.
It is too soon to say what is driving short-term volatility in growth stocks, but a common narrative is sensitivity to long-term interest rates. When interest rates are near zero, earnings far in the future are worth almost as much as current earnings. Higher rates bring greater scrutiny on companies with low or no present earnings.
The past several months demonstrated the importance of maintaining meaningful allocations to all sectors and styles within the U.S. equity market. We believe international exposure also remains critical.
Daily COVID-19 case rates remain uncomfortably high, but more states continue to ease restrictions and employment is recovering sharply. With the stimulus bill signed on March 10, most American families are set to receive $1400 per person, including dependents. This is a massive injection. With pent up demand, it should set up strong economic growth in 2021. The long-term implications on inflation and interest rates are yet to be known. The Ten-Year Treasury yield has increased from 0.9% to 1.5% so far this year.
Investor sentiment overall remains polarized. Some investors remain fearful, and many seem to be letting greed influence their investment decisions, bouncing from one trendy pick to another. While gains have broadened beyond a narrow basket of momentum stocks and the air has started to come out of the SPAC bubble, there is still plenty of froth. Many high multiple stocks remain perilous, in our view.
Personal Capital Managed Portfolios: For a second straight quarter, our more diversified approach to U.S. equities has boosted performance relative to concentrated, tech-heavy capitalization weighted indexes. Small cap and international equity exposure also helped absolute return on the equity side recently. A modestly lower duration in the bond portfolio has been beneficial so far in Q1, creating greater stability as yields rise. TLT, a popular long-term treasury ETF, is down double digits for the year. Personal Capital portfolios do not currently have meaningful direct exposure to 20+ year Treasuries.