We Had Another Reminder Why Diversification Is Important

seekingalpha08-14

The market pullback led by the fall of the "Mag 7" stocks highlights the importance of diversification.Unlikely Fed will cut rates due to recent volatility, investors should stay at their risk ...

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}\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nWe Had Another Reminder Why Diversification Is Important\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-08-14 19:00 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4714206-we-had-another-reminder-why-diversification-is-important><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>The market pullback led by the fall of the \"Mag 7\" stocks highlights the importance of diversification.Unlikely Fed will cut rates due to recent volatility, investors should stay at their risk ...</p>\n\n<a href=\"https://seekingalpha.com/article/4714206-we-had-another-reminder-why-diversification-is-important\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"BK4582","symbol_name":"ESG ETF-MSCI","start_time":0,"source_url":"https://seekingalpha.com/article/4714206-we-had-another-reminder-why-diversification-is-important","article_id":"2459126059","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1765965955/image_1765965955.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2459126059","pubTimestamp":1723633200,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":") and I don't see that changing going forward. But it does reiterate that even the most quality of large-cap names are prone to corrective market forces. When we see big, consistent gains over a 12- or 18-month period, it should not come as a big surprise when things turn around. That was the case here, and it will undoubtedly happen again in the future. What we can take away from this is to remind ourselves not to be too concentrated on any one stock, fund, or theme, no matter how strong the momentum is. Mag 7 had one of the best runs  but even that did not make some of the members of that collective immune to falling 25-50%. Readers should continuously monitor their portfolio for any excess in a particular area, especially when indices such as the S&P 500 or NASDAQ 100 become dominated by just a few names. **I own the Mag 7 through the Vanguard S&P 500 ETF  and the Invesco QQQ Trust ETF . I Don't Expect A Fed Cut From This Volatility The next topic of discussion that is top-of-mind f","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4582":"ESG ETF-MSCI","FDN":"First Trust Dow Jones Internet I","BK4593":"纳斯达克ETF","EWA":"澳大利亚ETF-iShares MSCI","BK4534":"瑞士信贷持仓","BK4585":"ETF&股票定投概念","BK4559":"巴菲特持仓","BK4561":"索罗斯持仓","EWC":"加拿大ETF-iShares MSCI","VOO":"Vanguard标普500ETF","BK4550":"红杉资本持仓","BK4588":"碎股","BK4581":"高盛持仓","SCHF":"Schwab International Equity ETF","FEZ":"SPDR EURO STOXX 50 ETF"},"translate_title":"我们还有另一个提醒，为什么多元化很重要","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"SCHF":1,"VOO":1,"FEZ":1,"EWC":1,"EWA":1,"FDN":0.9,"US7Y.BOND":0.9,"US6M.BOND":0.9,"US10Y.BOND":0.9,"US12M.BOND":0.9,"US2Y.BOND":0.9,"US30Y.BOND":0.9,"US3Y.BOND":0.9,"US5Y.BOND":0.9,"US912797HE00.BOND":0.6,"US912797GW17.BOND":0.6,"US912797GL51.BOND":0.6,"US912797GK78.BOND":0.6},"content_text":"The market pullback led by the fall of the \"Mag 7\" stocks highlights the importance of diversification.Unlikely Fed will cut rates due to recent volatility, investors should stay at their risk tolerance levels.Looking beyond US borders for non-US stocks can provide diversification and potential outperformance.   Matteo Colombo Main Thesis & Background The purpose of this article is to evaluate the broader equity market and how the last few weeks have been impacting markets. Importantly, this has served as a reminder that staying diversified - through any number of strategies - remains relevant even today. With a year once dominated by the \"Magnificent 7\", we have seen how quickly in the most favorable of stocks can fall out of favor. In this review, I will tackle what we have seen through the summer months, where I see things heading, and how readers can keep their portfolio balanced to avoid concentration risk that has crept into some of the major world indices. Mag 7 Was The Story - Until It Wasn't The big story over the past couple of weeks has, of course, been the market pullback. The NASDAQ itself fell into correction territory (defined by a 10% or larger drop) and global stocks fell along with it. This was a sharp contrast to the first half of the year when the Mag 7 dominated headlines, gains, and drove the major US indices to record highs. This was a continuation of a trend that started last year and left some of these names with some lofty valuations. The net result was a broad sell-off across each name in that \"Mag 7\" line-up, although the falls were not all the same magnitude. All fell by double-digits, but the disparity between names was quite wide, as shown below: Recent Drops (Mag 7) (S&P Global) The point I am making here is a classic one. What goes up often goes down, even the best names out there. Of course, this doesn't mean flee the Mag 7. I own plenty of it (hard not to!) and I don't see that changing going forward. But it does reiterate that even the most quality of large-cap names are prone to corrective market forces. When we see big, consistent gains over a 12- or 18-month period, it should not come as a big surprise when things turn around. That was the case here, and it will undoubtedly happen again in the future. What we can take away from this is to remind ourselves not to be too concentrated on any one stock, fund, or theme, no matter how strong the momentum is. Mag 7 had one of the best runs (and it very well might again) but even that did not make some of the members of that collective immune to falling 25-50%. Readers should continuously monitor their portfolio for any excess in a particular area, especially when indices such as the S&P 500 or NASDAQ 100 become dominated by just a few names. **I own the Mag 7 through the Vanguard S&P 500 ETF (VOO) and the Invesco QQQ Trust ETF (QQQ). I Don't Expect A Fed Cut From This Volatility The next topic of discussion that is top-of-mind for me is potential action from the Fed. Due to the short-term volatility, some market participants are expecting a Fed \"emergency\" rate cut. The thinking is the Fed will want to calm markets and prevent the thinking they will be late to the game to stave off a recession in the US. With unemployment ticking up and inflation continuing to trend lower, there is some support for this argument: US Employment Picture (US Bureau of Labor Statistics) The reality is that there is a valid argument coming out of the employment data and market weakness to think the Fed might step in. So I'm not saying this is a far-fetched idea or that I am 100% certain the central bank won't act. But what I am saying is I find that unlikely. So if you are buying into equities now in the hopes of a Fed-sparked rally, I think you are being a bit too optimistic. The Fed under Chairman Powell has been fairly steadfast in its objective in the last couple of years. The Fed has kept the benchmark rate unchanged for a long time now, and some short-term market volatility is not going to change their thinking, in my view. In any event, even if the Fed were to move the rate by .25 basis points which the market is hoping for, I don't see that making a major difference given that rates are well above their long-term average over recent decades: Fed Funds Rate (Last 20 Years) (Federal Reserve) What I see here is a more hawkish Fed than the market wants, and so far, the market has been dead wrong on rate cut timing. I think they will be wrong again, and the Fed is not going to inject itself into this market sell-off with a minor rate cut. I don't see it accomplishing much anyway if they did, and I believe the central bankers feel the same. What readers can get out of this is to make sure to stay at their respective risk tolerance levels. Tacking on risk or amplifying positions because the market has come back a bit this week on the hopes of Fed action is not a wise move. Invest for fundamentals, not because of potential interest rate volatility. Doing so sets you up for portfolio swings and/or further losses you may not be able to withstand at the moment. Keep this in mind when deciding if buying-in now truly is compatible with your investment plan. Don't Ignore The \"Rest Of The World\" Expanding on the prior points, I again believe that the merit behind buying non-US (developed) stocks is a strong move in most climates. Of course, global stocks have been victims of the volatility of late as well. This is not a risk-off play or one that is necessarily going to counter-balance drops in the US markets. But it does give investors exposure to different sectors, themes, and underlying companies that can help smooth out the ride. While the Mag 7, even after the sell-off, continues to dominate US indices, looking outside our domestic borders can be a beneficial strategy over time. And it isn't just diversification for the sake of diversification. We can often find \"alpha\" overseas - and that includes right now! While we have seen a lot of focus on the Mag 7 here at home, that isn't the only winning play. In fact, the performance of those stocks has masked some of the weaknesses of other corners of the US market. The fact is that ex-US indices don't have the benefit of seeing just a handful of names drive their markets higher, yet those indices have moved higher nonetheless. This market breadth should be evident if we examine what the top-performing individual names are across the globe. Yes, the Mag 7 are in that bucket, but most of the names are actually headquartered outside the US: % Of \"Top Performance Stocks\" That Are Non-US (Lord Abbett) The conclusion I draw here is that looking beyond the US border does not mean sacrificing returns. In fact, one could actually have outperformed quite significantly if they held the Mag 7 and a combination of non-US equities. With so many top-performing stocks sitting in non-US index funds, looking outside the traditional large-cap US stock fund could pay dividends (no pun intended). **I own the iShares MSCI Canada ETF (EWC), the iShares MSCI Australia ETF (EWA), the Schwab International Equity ETF (SCHF), and the SPDR EURO STOXX 50 ETF (FEZ). What Are Some Positive Metrics To Support Long Positions? Certainly, recent headlines have been dominated by negative news of late. And there are plenty of headwinds to concern ourselves with, from geopolitical strife to economic figures. But the news loves to sell the bad more than the good, so often the good can be overlooked. But there is good out there that we can look to if we want to support equity positioning in the months ahead. So what are some of those positive signs? One is US labor force productivity. This is a boon for investors because it makes the companies they invest in more profitable, all other things being equal. A more productive labor force means less waste and cheaper cost of goods sold - two trends that are clearly evident in the last few quarters here in the US: Productivity and Labor Costs (US) (Bloomberg) This is a supportive attribute for why US corporate earnings have been able to grow - the underlying companies are able to \"do more with less\" as productivity rises. That is a win-win for shareholders and the economy as a whole. In addition to the above, another positive factor for the US has been the steady decline of inflation on a year-over-year basis. Yes, prices are still quite high and lower-income Americans remain strapped. But the light at the end of the tunnel is in sight, with major inflation metrics ticking to the Fed's 2% target: Inflation (YOY Change) (US) (US Bureau of Economic Analysis) I use this as support for confirmation the Fed has hit its peak interest rate and the next move will be lower. There is a good chance that by the December meeting (my estimate), the Fed will move on a .25 or .50 basis point cut. As I mentioned earlier, I am not of the opinion an \"emergency\" cut is coming, and I'm mixed on whether September is too early. I, personally, believe it is, as the Fed has waited so long already, I don't see them rushing to make that first cut. But with the Bank of England already moving, that could give the Fed the justification to make its own move in September. If it does, these other positive attributes combined with lower rates could push stocks higher heading into Q4. Bottom-line The market has seen some choppiness and investors are beginning to fret over global conflicts, stubborn inflation, reluctant central banks, and (perhaps finally) valuations. This is creating some uneasiness among retail investors to be sure, but to me, this just means we need to reflect and make sure our portfolios are balanced appropriately with our long-term goals. While military conflicts and tariff rhetoric are also raising concerns about global cooperation, we should reflect that all may not be as bad as it seems. With populist politicians looking to boost their base with protectionist policies, we should remember that global trade remains elevated well above what we have seen in prior years. Yes, some tariffs are in place, but they haven't stifled trade in a way that is getting in the way of strong corporate earnings:   Global Trade Volumes (Charles Schwab) This makes it evident to me that countries are working together more than they are against each other. That is supportive for international corporations, which make up the bulk of developed market indices that most American investors own. This bodes well for returns going forward and hopefully puts readers more at ease than they would be if they were only reading the negative headlines.  To sum this all up, I doubt the volatility is totally behind us, but those who stay balanced and patient are likely to be able to pick up some quality names at relatively reasonable prices compared to what we saw earlier in 2024. This means I see buying opportunities ahead, but continue to caution my followers to stay disciplined, not to overextend themselves, and to remember to look abroad for value as long as US indices remain heavily concentrated.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.28.3","shortVersion":"4.28.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2459126059"}