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Weekly Market Digest: Volatility Returns & There is No Predicting Performance

It was another wild week for markets. A strong relief rally on Tuesday helped push global stocks into positive territory, only to be partially offset by steep declines Thursday.

Losses continue to be driven by ongoing fears surrounding trade and interest rates, which accelerated on news Steven Mnuchin would not participate in Saudi Arabia’s upcoming investor summit. Despite this, the S&P 500 was still able to lock in a small gain for the week, while foreign stocks ended down. Outside of gold and real estate, most other asset classes posted weekly declines, including bonds.

Weekly Returns

S&P 500: 2,769 (+0.1%)
FTSE All-World ex-US (VEU): (-0.5%)
US 10 Year Treasury Yield: 3.20% (+0.05%)
Gold: $1,227 (+0.4%)
EUR/USD: $1.151 (-0.4%)

Major Events:

  • Monday – With less than 700 stores nationwide, Sears officially filed for bankruptcy after years of struggles.
  • Monday – Bank of America reported better-than-expected results, with earnings increasing 32% on higher interest rates and a continued lift from the corporate tax cuts.
  • Tuesday – President Trump publicly criticized the Fed’s interest rate policy, calling the central bank his “biggest threat”.
  • Thursday – One of Afghanistan’s most prominent police chiefs was killed in a Taliban attack, which narrowly missed the top US commander in the country.
  • Thursday – Treasury secretary Steven Mnuchin cancelled his planned participation at a summit in Saudi Arabia in response to the suspected killing of a prominent journalist by the Saudi government.
  • Friday – Facebook announced that it hired Nick Clegg, Britain’s former deputy prime minister, as its top policy and communications executive.
  • Friday – US existing home sales came in weaker than expected, posting the sixth straight monthly drop.

Our Take

Today, we essentially hit the one month mark from the market top on September 20th. Since then, it’s been a pretty volatile ride, but it’s certainly been interesting to watch performance both before and after the top. Growth previously led value, but recently, the peak value is leading. Small cap previously led large, but now large is ahead. Discretionary was the top performing sector, now it’s Utilities.

A lot of this makes sense as categories that go up the most tend to come down the most during pullbacks. However, it also goes to show how difficult it is to predict winning categories. Any guesses on the top performing sector for the full year? It’s not Tech or Discretionary—it’s actually Health Care. And who would have thought boring old Utilities would be one of the top five sectors year to date?

In fact, if you had to guess what sector performed best over the last 20 years, Tech or Utilities, which would you choose? Most of you probably assumed this is a trick question and guessed Utilities, right? Well if so, you’d be correct! From December 31st, 1998 through yesterday (10/18), the Utilities sector (represented by XLU) is up more than 250%, compared to Technology which is up close to 170% (represented by XLK). That’s huge.

Of course some might consider this cherry picking since Technology had a severe downturn in the early 2000s, but it’s all relative. This would have made a very REAL difference for someone investing in the late 1990’s. By 1999, the Technology sector made up roughly 29% of the S&P 500. This compares to a mere ~2% weight for Utilities. So even if someone bought a “diversified” S&P 500 fund, they would have invested more than 13x of their money in the underperforming sector.

The truth, however, is that it was actually a lot worse for many people. No one in 1998 wanted to sit idly and watch their friends get rich on hot stocks, so they placed even bigger concentrated bets on Tech. You would have been called crazy had you told your friends Utilities are where it’s at. And for a while you would have actually looked crazy. But we all know what happened next.

How does this relate to today? Well, we don’t think we’re in a massive Technology bubble like the late 1990s, but it’s certainly becoming a concentrated bet for many investors. Before the recent GICS changes, the Technology sector had grown to more than a quarter of the S&P 500. That’s a big weight.

Moreover, we see a lot of people piling into the same crowded trades, like the FAANG stocks. Out of the many free users of our Financial Dashboard, more than 30% of them with at least $100,000 in assets had direct exposure to some or all of the FAANG stocks. And those stocks by themselves represented, on average, 16% of these users US equity exposure. That compares to about 10% for a broader market index fund, like VTI. In other words, their exposure is 60% higher than the broader market! And for users with less than $100,000 in assets, the concentration was even greater.

What does all this mean? Simply put, no one can predict exactly what category will perform best. And if we know that’s the case, why allocate an outsized portion of your net worth to a single sector? As recent volatility has shown, these trends can reverse in a heartbeat. We’re not saying investors should dump Tech stocks—they should absolutely be an integral part of any well-diversified portfolio. But they should be owned in moderation and on more equal footing with all of the other sectors. After all, do you really know which one will outperform over the next 20 years?

For more information, read our free “Investor’s Guide to Volatile Markets”.

Read the Free Guide

*Sources: Standard & Poor’s, Xignite

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.

Brendan Erne serves as the Director of Portfolio Management at Personal Capital. After several years as an equity analyst covering the technology and communication sectors, he joined Personal Capital in 2011, just before its official launch to the public. He helped create and manage the firm’s investment portfolios and build out the broader research team. He also co-authored Fisher Investments on Technology, published by John Wiley & Sons. Brendan is a CFA charterholder.
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