Investors from both parties experienced a sense of paralysis and dread leading up to the election, often sitting on the sidelines waiting for it. Not surprisingly, the market’s first move was contrarian, moving higher.
For capital markets, the path of the pandemic is probably more important than the election. The onset of fall has brought a massive surge in cases, along with encouraging news on vaccine development. Initial investor reaction so far has been positive, favoring a longer-term view. This may grow challenging to maintain over a difficult winter and as the realities of fresh rounds of economic shutdown hit.
News of effective vaccines spurred an acceleration of a move from high momentum “stay-at-home” stocks into battered value and physical economy stocks. In our view, mid-summer marked the point when enthusiasm for a select group of high momentum stocks pushed beyond reasonable fundamental justification and into speculative bubble territory.
For the year to date, large tech stocks retain significant leadership. As of mid-November, the ten biggest stocks now 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, the risks of concentrated portfolios could be the highest since 1999. We believe it is important for investors to maintain meaningful allocations to all parts of the US market and not to ignore lower priced international equities. We do not know if the rotation out of a narrow slice of momentum stocks into the broader market will persist into 2021.
Regardless of timing, diversified approaches that feature rebalancing should fare best over full market cycles.
Bonds have benefitted from the pandemic as the Fed brought short term rates back to zero. Longer-dated treasuries spiked as a safe-haven in Q1, though since mid-year, corporate bonds have fared better than government.
Personal Capital Managed Portfolios: On top of strong absolute market returns, a more diversified approach to US equities has boosted recent performance relative to concentrated, tech-heavy capitalization weighted indexes. Small cap and international equity exposure have helped on the equity side while modestly lower duration in the bond portfolio has also been beneficial so far in Q4.