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Market environments are driven not just by industry preferences, but also by a bias toward the very largest companies. We have developed a new set of groups composed of the 10 largest companies from each sector. With several of these baskets sporting positive rankings, we felt a closer look was in order.
Everyone is struggling with allocations to a fixed-income market that seems exceptionally over-priced. Cash rates remain near zero, and the 10-year Treasury yield—at 1.65%—sells at a 61x P/E multiple for a coupon without any growth! Moreover, junk-yield spreads are near record lows, and investment-grade credit spreads are at their tightest levels in at least 20 years. Finally, it’s a pretty good bet that yields are headed higher in the next few years.
We launched a revamped version of our Major Trend Index. The objective of the new methodology is to increase the flexibility, and even the subjectivity of the MTI. This approach recognizes the “subjective reality,” without forcing us into the tedium of re-weighting sub-factors if they become more or less critical as market dynamics evolve.
Driven by massive government stimulus, an imminent vaccine rollout, and the expectation of record earnings in 2021, investors seem to be on the verge of embracing a move away from Large Cap Growth stocks in earnest. The leading candidates offered as broad-based alternatives to Large Growth (LG) include Value, Small Caps, and Emerging Markets.
Balanced portfolio investors face a difficult challenge finding equity alternatives that modify risk without overly reducing reward. The problem is acute because traditional choices have lost much of their historic appeal. Cash certainly lessens volatility, but, with a zero yield, its reward penalty is excessive.
Although COVID-19 has significantly impacted everyone, its economic wake has been unusually bifurcated compared to past crises. Since the pandemic requires social distancing, the recession and its aftermath have been concentrated disproportionately among “social and lower-earning” industries. This odd, if not unique, divergence in the economic fortunes of low and high-earning industries perhaps explains how overall real GDP, the unemployment rate, the housing industry, manufacturing activities, and other economic segments have managed to recover quickly and powerfully.