The Curse of the Diverse

Published On: October 23, 2018

Written by: Ben Atwater and Matt Malick

• Despite the impression of many that stocks have done well in 2018, most asset classes have done poorly.
• Diversification hasn’t been effective. This has made 2018 a difficult year for portfolios.
• As the chart below demonstrates, large cap U.S. growth stocks have done well. This is a very narrow subset of the global stock market.  The large market capitalization of companies like Netflix and Amazon have had a disproportionately positive effect on the Standard and Poor’s 500 return.  However, in recent weeks, even these stocks are slipping (for now).

• While growth is up 7.14% (blue line) year to date, everything else is negative. International has fallen 11.3% (red line); bonds have dropped 2.27% (purple line); U.S. value has dipped 2.79% (orange line); while U.S. small caps have slipped 1.28% (green line).
• The narrow market leadership is concerning. A small number of stocks supporting the overall market is not sustainable, especially when considering the extreme valuation of large cap U.S. growth.
• The market needs to see a broader-based rally in all kinds of assets classes. Otherwise, markets may be telling us that a far greater challenge lies ahead.

Please visit www.atwatermalick.com/ria for full disclosure materials related to recommendations contained in this update.