In a Market Where
Everything Goes Up, I Believe Investors Should be Cautious
Investors may remember some bleak statistics from the end of
2018, when a Deutsche Bank analysis showed that 90% of investible asset classes
traded negative for the year.1 This across-the-board poor
performance was unprecedented as far back as records went, and investors faced
the harsh reality of having very few places to generate returns.
Year-to-date, 2019 bears no resemblance to 2018. Investible
asset classes have been rising in tandem, delivering stout across-the-board
returns to investors and bringing optimism back into the markets. From stocks
to commodities to fixed income, investors reaped the benefits of ownership in
Q1.
Returns in Q1 2019:2
- S&P 500: +14.96%
- Only 40 of the 500 stocks in the S&P 500 are
down this year
- MSCI Emerging Markets: +10.82%
- Bloomberg Commodity (one-month forward): +7.51%
- NAREIT Equity REIT Index (real estate): +17.2%
- Bloomberg Barclays U.S. Aggregate Credit (high
yield bonds): +7.3%
- Bloomberg Barclays Municipal Bond 10-Year: +3.2%
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When Investors Start Chasing Heat, You Should Focus on Fundamentals!
Strong gains can push some investors
to “chase heat” and over-allocate to riskier assets. In times like these, I think it is best to
stick to hard data and a well-diversified portfolio. To help you do this, we are offering all
readers a first look into our just-released May 2019 Stock Market Outlook
report.
This report will provide you with our forecasts
along with additional factors to consider:
- For how long will 2019 stay bullish?
- Zacks global markets’ outlook
- What sectors show the best opportunity?
- What industries within those sectors most merit your
attention?
- Forecast for the S&P
- Small-cap vs. large-cap returns
- And much more.
If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!
IT’S FREE. Download the Just-Released May 2019 Stock Market Outlook3
______________________________________________________________________________
Some of the biggest names in technology have been the top
beneficiaries of the market rebound. Through early April, the S&P 500
technology group is up +22% on the year compared to the roughly +15% gain for
the S&P 500. It should be noted, too, that these tech gains do not even
include the likes of Amazon, Google, Facebook, and Netflix, since these
companies were moved out of the technology sector and into the “communication services”
sector last year. The renewed enthusiasm for tech largely centers around
investor interest in semiconductor and software companies, though to be sure, FAANG
stocks continue to outperform.4
The list of solid performers in 2019 goes on. To be fair,
many of these solid positive returns make up the “v-shaped” recovery from
2018’s late year selloff, so in many cases investors are just clawing back
unrealized losses to move back toward all-time highs. At the end of the day, I
don’t want to spoil the fun, and investors should feel good about the recovery
and rising prices across the board. But rapidly rising prices, and the optimism
and enthusiasm that comes with it, should also give investors pause.
My concern isn’t that all of these rising asset classes are
due to come crashing down in unison. My concern is that enthusiasm for strong
gains may lead some investors to “chase heat” and in the process, over-allocate
money into riskier assets.
My experience informs me that in situations like this, in an
effort to capture outperformance on the way back up, investors are often
tempted to shift assets into top performing asset classes, like technology. And
with the technology sector due to deliver several high-profile IPOs like Lyft
(already trading), Uber, Pinterest, and others, I worry that many investors
will compromise well-diversified portfolios for highly-concentrated portfolios.
While highly concentrated portfolios can sometimes deliver outsized returns,
they also come with higher levels of risk and can also deliver outsized losses.
Given how far we are into the current business cycle, I don’t like the
risk-reward setup for anything other than a well-diversified portfolio.
Bottom Line for
Investors
The current ‘uniformity’ of returns across various asset
classes seems likely, in my view, to emerge as a problem sometime down the
road. It may not be this quarter or even next. But should the current trend
continue, I would expect some kind of reckoning in the form of a correction.
For investors, my advice is to resist skewing your
portfolio’s allocation to favor top-performing asset classes. What may deliver
you alpha in the short-term, can also make the pain of declines feel a lot
worse on the way down. This late into the economic and business cycle, I
believe it is of utmost importance to align your portfolio allocation with your
risk tolerance and needs, and to stay in your ‘lane’ even as the temptation of
tech IPOs and hot asset classes like REITs come calling.
Staying focused on the entire market picture is a great way to avoid only favoring the top performers. To help you stay focused these fundamentals and market updates, we are offering all readers a first-look into our just-released May 2019 Stock Market Outlook report.
This report will provide you with our forecasts along with additional factors to consider:
- For how long will 2019 stay bullish?
- Zacks global markets’ outlook
- What sectors show the best opportunity?
- What industries within those sectors most merit your
attention?
- Forecast for the S&P
- Small-cap vs. large-cap returns
- And much more.
If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!5
Disclosure
1 The Wall Street Journal, April 2, 2019. https://www.wsj.com/articles/beware-the-market-where-everything-goes-up-11554199900
2 The Wall Street Journal, April 2, 2019. https://www.wsj.com/articles/beware-the-market-where-everything-goes-up-11554199900
3 Zacks Investment Management reserves the right to amend the terms or rescind the free Stock Market Outlook offer at any time and for any reason at its discretion.
4 The Wall Street Journal, April 9, 2019. https://www.wsj.com/articles/investors-hunger-for-growth-pushes-tech-stocks-to-record-11554811201
5 Zacks Investment Management reserves the right to amend the terms or rescind the free Stock Market Outlook offer at any time and for any reason at its discretion.
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The S&P 500 Index is a well-known, unmanaged index of the prices of 500 large-company common stocks, mainly blue-chip stocks, selected by Standard & Poor’s. The S&P 500 Index assumes reinvestment of dividends but does not reflect advisory fees. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. An investor cannot invest directly in an index.
The MSCI Emerging Markets Index is an unmanaged index considered representative of stocks of developing countries. The index is computed using the net return, which withholds applicable taxes for non-resident investors. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. An investor cannot invest directly in an index.
The Bloomberg Commodity (one-month forward) index is composed of longer-dated futures contracts on 22 physical commodities. It reflects the return of underlying commodity futures price movements only and is quoted in USD. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. An investor cannot invest directly in an index.
The FTSE Nareit Equity REITs Index is a free-float adjusted, market capitalization-weighted index of U.S. equity REITs. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. An investor cannot invest directly in an index.
The Bloomberg Barclays Capital U.S. Aggregate Bond Index represents the price and yield performance, before fees and expenses, of the total United States investment grade bond market. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. An investor cannot invest directly in an index.
Bloomberg Barclays 10-Year Municipal Bond Index: Is an unmanaged index with maturities between nine and twelve years. The Bloomberg Barclays 10-Year Municipal Bond Index is the 10-Year total return subset of the Bloomberg Barclays Municipal Bond Index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. An investor cannot invest directly in an index