Juggling Dynamite

Some of the largest funds held in retirement savings accounts–presumed to be well-diversified–are not.  This exposes holders to larger drawdown risk and volatility than most understand.  As hot stocks and sectors have pulled markets higher, their concentration in benchmarks and portfolios has increased.  See Tech Stock Rout is raising risks for American pension plans:

A handful of mega-cap tech stocks make up around 30% of some of the most popular funds in retirement plans, according to data compiled by Bloomberg.

Those big slugs of tech have rewarded investors handsomely — in 2020, Apple Inc. gained more than 80% and Amazon.com Inc. more than 76%. But when benchmark 10-year U.S. Treasury bond yields spiked to a one-year high on Thursday, and fears grew that an era of very low-interest rates could be nearing an end, the soaring valuations of mega-cap tech stocks became harder to justify and the shares led the broad market down.

…With mega-cap tech shares on a tear, and a stock’s weight in the S&P index determined by its market capitalization, just five tech companies — Apple, Microsoft Corp., Amazon, Facebook Inc., and Google parent Alphabet Inc. — make up 24% of the index, up from 17% at the start of 2020.

In the last market bust in 2000, the leading tech darlings fell an average of 80% and took 15 years to recover their 2000 high.  With boomer savers now 20 years older, a similar setback will be that much harder to recover from.

The highest quality bonds have sold off-year to date while risky assets have leapt.  The opposite happened last February to March when risk assets last crashed.  The negative correlation offered by treasury bonds is extremely valuable in managing portfolio risk.

As typical, equity-bulls are declaring a few percentage point decline in bond prices ‘carnage’ and warn that long bonds have ‘duration’ risk (time to get your money back through weighted cash flows) while failing to mention (or appreciate?) that the duration risk in equities is much larger than bonds.  Equities have no set maturity date at all, no contractually required income payments, and can drop as much as 100% in a matter of hours and days.

With a dividend yield of 1.5%, the S&P 500 has a duration at least twice as long as a 30-year treasury and dropped 37% last year in just 3 weeks. Stocks that pay no dividends are even worse.  Nonsense is the universal currency of many market commentators.

Yes, and stocks have durations of 60 years plus and dropped twice as much as the 30 yr in 3 weeks a year ago, with no maturity date or required income payments. Are priced to drop even more from here. Duration indeed. https://t.co/IW7BPaFuUF

— Danielle Park (@kdaniellepark) March 1, 2021

With most convinced inflation will run hot and treasury yields continue to climb (as their prices fall), we are watching closely for another valuable buying opportunity to add the highest credit-quality bonds.  David Rosenberg explains more on why in the clip below.

David Rosenberg of Rosenberg Research predicts the 10-year Treasury Note yield will fall to 1%. Here is a direct video link.

Mark Z. Jacobson is Director of the Atmosphere/Energy Program and Professor of Civil and Environmental  Engineering at Stanford University. He seeks to understand air pollution and global warming problems and to develop large-scale clean, renewable energy solutions to these major and urgent problems. His most recent book, published by Cambridge University Press, is titled 100 Percent Clean, Renewable Energy and Storage for Everything. The book is the culmination of Dr. Jacobson’s life’s work on transitioning the world to 100% clean, renewable energy, and it examines the technologies, economics, and social/political aspects of that transition.

On February 9, as part of the Joint Declaration of the Global 100% Renewable Energy Strategy Group, Dr. Jacobson joined other leading climate scientists and experts to propose a 10 point declaration to transform the world’s energy supply to 100% renewable energy. This statement will be specifically published in support of President Biden’s United States climate change agenda.

Here is a direct audio link.  You can skip the preamble by advancing the play bar to the 3-minute mark.