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. 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:
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%
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.
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.