September 2020 Allocation Outlook

September 28, 2020

September 2020 Allocation Outlook

With market valuations where they are (high), rebalancing equities to the original allocation makes sense.  Additionally, with the current COVID/Election/SCOTUS/social unrest, it seems that Congress will delay passing a new stimulus package (the two sides are only $1.4 TRILLION! apart).  With market volatility likely ahead, it could be prudent to reduce equities on a case-by-case basis.    

Large capitalization US growth stocks have led the way in the markets since the Great Recession.  However, the S&P is market capitalization weighted (# of outstanding shares multiplied by share price divided by a factor [currently almost $9 billion]).  That means the FAANG stocks (Facebook, Apple, Amazon, Netflix, Google) and especially the FANMAG stocks (add Microsoft) account for about 25% of the S&P500.  Therefore, we feel reducing exposure to the FANMAG stocks in portfolios is a smart play.  We believe that at some point, the market will begin to rotate towards smaller market capitalization, value, and international stocks.  With bonds paying very little in yield, investors will begin to look for income in stocks.  Additionally, the P/E ratios of the FANMAG stocks are nearly twice the rest of the market.  Going forward earnings by the non-FANMAG stocks should improve making those stocks more attractive.

Technology - Technology is currently 26% of the S&P500 allocation.  We still believe in technology, it is prevalent in every part of our lives today.  We like an overweight position in Technology.  Many Technology ETFs are highly over-weighed to the FANMAG stocks; therefore, we are looking for equal weight ETFs rather than cap weighted.

Consumer Staples – We feel keeping at the 7%, market weight of the S&P500 is the right move here.  Companies involved with food production/delivery and food supercenters are a focus.

Consumer Discretionary – Currently 11% of the S&P500, we would go with a slight overweight to this sector.  Most ETFs in this sector have upwards of 15-20% AMZN.  We feel that is too heavy of an exposure to one stock.  We are looking at home furnishing, auto retail and parts, and online shopping.  Staying away from casinos, hotels, and restaurants.  It currently is a stay-at-home economy.

Energy – The S&P500 has a 2% allocation to Energy and we think that is prudent. 

Financials – 10% of the S&P500, and we think it should be underweight.   Banks could have rough seas ahead as commercial real-estate defaults pile up affecting bank’s balance sheets.  Investment banking and brokerages is our focus. 

Health Care – Is 14% of the S&P500 and market weight is about right.  We think that health care distributors, suppliers, and facilities should be part of holdings in this sector along with biotech and pharma.

Industrials – Market weight is 9%, we are slightly overweight Industrials.  Building services, logistics, electrical components, and trucking are attractive.

Materials – Currently 3% of the S&P500 and we think overweight is the place to be.  We like building products, mining, and packaging. 

Communication Services – 10% weighting currently and it should be an overweight position.  We think equal weight in holdings rather than cap-weight so that Facebook and Netflix do not dominate the performance of this sector.

Utilities – The S&P500 has a 3% allocation to Utilities and we feel an underweight is appropriate.  We like utility companies that are looking towards alternative energy sources. 

Real Estate – 3% weighting in the S&P and we are underweight. 

Bonds – We continue to monitor individual bond positions in portfolios for credit quality.  We think that clients should hold individual bonds until they mature and then address what to do with the cash.  Municipalities have some concerns, with state revenues forecast to fall three times more than during the Great Recession.  However, states have done well with holding cash reserves equivalent to 9% more than their expenses on average for 2020.  The key for municipals is the strength of individual states balance sheets.  The Fed has backstopped Corporates; however, this has driven yields down.

As always, we welcome your input, questions, and feedback.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.

No strategy, such as diversification, can assure success or protect against loss in periods of declining values. Investing involves risk, including loss of principal. Asset allocation does not protect against loss of principal due to market fluctuations.  It is a method used to help manage investment risk.

 All indexes are unmanaged and an individual cannot invest directly in an index. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. Past performance is no guarantee of future results. The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors. The Standard & Poor's 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.