Weekly Market Digest: Why It’s Important To Manage Concentration Risk

We ended a volatile week in markets with mixed results as U.S. stocks finished higher, while international equities finished lower. Safe-haven assets like gold and U.S. Treasuries both finished higher on the week as investors digested mixed economic and Coronavirus data.

Weekly Returns

S&P 500: 3271.1 (+1.73%)
FTSE All-World ex-US (VEU): (-1.02%)
US 10 Year Treasury Yield: 0.54% (-0.04)
Gold: 1974.89 (+3.86%)
EUR/USD: 1.18 (+1.10%)

Major Events

  • Monday – Positive economic news delivered as the U.S. Manufacturing Sector sees new orders increase by the most in two years.
  • Tuesday – The Federal Reserve announced it would be extending its business lending programs to the end of 2020.
  • Wednesday – The Fed pledges to keep interest rates near zero for as long as it takes the economy to begin to recover.
  • Wednesday – The next stimulus bill appeared to have stalled in congress as Democrats and some Republicans struggle to agree on priorities and size.
  • Thursday – The U.S. Economy contracted 32.9% in the Second Quarter.
  • Friday – Consumer spending for June reported to Rise 5.6%.

Our Take

Although a slew of negative economic data was released this week, investors continue to look ahead to a potential COVID-19 vaccine (a vaccine developed by Moderna began its Phase 3 Trial this week). The virus, U.S. response, and presidential election continue to be front and center in the minds of investors. With so much uncertainty still ahead, we believe diversified portfolios will begin to look more and more attractive. As my colleague Paul Deer mentioned in last week’s post, the concentration of the largest U.S. companies continues to increase and did so again this week despite testifying in front of congress as part of U.S. Antitrust Probes.

A study by FactSet and Goldman Sachs showed that the 5 largest companies in the S&P 500 have accounted for all of the growth in the index this year, while the remaining 495 companies have produced negative returns. This sort of market dislocation is one of the reasons why we take a more equal-weighted approach to equity investing. The S&P 500 may appear diversified if one simply looks at the number of constituents, however, in reality, it is becoming increasingly concentrated in a few companies and two sectors.

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