Uneven Recovery Creates Winners and Losers

Taking a closer look at the rise in the economy and stock market, investors will see how uneven this recovery has been. The residential housing sector is booming with limited supply and record low mortgage interest rates, yet small businesses – particularly ones reliant on travel, entertainment, and face to face consumer services – are still in a lame state. Yes, the S&P 500 Index recently made new all-time highs, but did you know that the average stock in the index is still down on the year? The S&P 500 Index’s average stock, major international indices, small and midcap stocks, high yield credit, and value equity styles have all stumbled out of the recovery gates due to COVID-19. Ever since the Federal Reserve rang the bell with 0% interest rates in March, mega-cap technology stocks and 30-year Treasury bonds broke out early with returns of over 20% this year.

At first, it may seem like an odd pair for both U.S. Treasury bonds and technology stocks to be performing so well together, but these two sectors have been racing higher on similar investor preferences for high credit quality, strong balance sheets and long duration assets in an environment of depressed inflation, secular sales growth, and negative real yields. While not reflective of the same composition of the U.S. economy, the technology sector represents approximately 30% of the S&P 500 Index, one of the highest concentrations amongst most of the major core equity indices, and a handful of these dominant mega-cap stocks are up over 30% on average this year. With such a large portion of the S&P 500 Index hitched to these crowd favorites, it’s not surprising the headline index is doing so well this year. The rest of the stock and credit market pack has been lagging, which has held back returns for broadly diversified portfolios.