The beginning of 2021 looks similar in many ways to Q4 of 2020. With vaccines rolling out and expectations of more stimulus high, stock prices are advancing, led by physical economy stocks which were out of favor for most of the previous year.
Existing stimulus bills and accommodative monetary policy have already created an unprecedented state of increased money supply and negative real interest rates, helping support valuations. Meanwhile, nominal ten-year Treasury yields have ticked back above 1%, highlighting the risk that spiraling debt will at some point be questioned by the bond markets and the possibility of higher inflation.
Interestingly, mega-cap technology shares are off to a slow start for the year, while speculative fervor in some other ultra-high momentum investments persists. Despite the recent small cap rally, the ten biggest stocks account for nearly 30% of the S&P 500, almost double the average from the last 40 years. In a pandemic world featuring heightened uncertainty, we believe the risks of concentrated portfolios remain the highest since 1999.
Investor sentiment overall remains polarized. Late summer may have marked a tipping point where fear of missing out pulled ahead of fear itself. Gains have broadened beyond a narrow basket of momentum stocks, but there is still plenty of froth, as evidenced by meteoric IPOs and the fast and furious GameStop saga. Many investors remain fearful, but more seem to be letting greed influence their investment decisions. Some high multiple stocks are feeling particularly perilous.
We view it as particularly important for investors to maintain meaningful allocations to all parts of the U.S. market and not to ignore lower priced international equities. We do not know if the recent rotation out of the narrow slice of growth stocks and into the broader market will persist into 2021. Regardless of timing, diversified approaches which feature rebalancing should fare best over full market cycles.
Personal Capital Managed Portfolios: A more diversified approach to U.S. equities has boosted recent performance relative to concentrated, tech-heavy capitalization weighted indexes. Small cap and international equity exposure have helped absolute return on the equity side. A modestly lower duration in the bond portfolio has also been beneficial so far in Q1.
