Given the anniversary of one of the longest bull markets in history, I wanted to ensure you have a good understanding of our portfolio strategy and the status of your investments.
The first thing to note is the U.S. index of large cap, blue-chip stocks has been up every year for the past 10 years. Currently, it’s up more than 350% since its low in March 2008. That’s significant and should make you question where we are from a valuation standpoint. In other words: Are U.S. stocks overvalued?
For the past couple years, the technology sector has been a significant driver of U.S. large cap returns. In fact, this sector plus Amazon represents nearly 30% of the entire U.S. stock market! (It was only that high once in history when the technology sector reached 35% of the S&P 500 during the 2000 tech bubble.)
Not surprisingly, this phenomenon is having a major impact on stock-market returns; so much so that 73% of this year’s S&P 500 return (9.6%) is from technology stocks.
If your portfolio is up significantly this year, you probably have a sizable allocation in technology stocks. The downside of this is that the sector is very expensive.
To assess how expensive or cheap a stock is, look at the price-to-earnings (P/E) ratio. The higher the ratio, the more expensive the stock.
The average P/E for the entire technology sector is around 28. (That’s much higher than the market’s historical average of 15.) What’s more, the top stocks look very high; some even sky high:
|AMAZON COM INC||153|
|FACEBOOK CLASS A INC||27|
Is this a bubble? Probably not. Overall, U.S. large cap stocks are slightly higher than their historical average.
First, your portfolio should have technology stocks, but a much smaller allocation than the market, with a tilt toward the cheaper ones (e.g., “value” stocks). In the Redwood equity portfolio, close to 12% is allocated to technology companies, compared to 30% in the overall market as mentioned above.
Next, we’ve added a significant amount of international and emerging-market stocks. Close to 50% of those stocks reside in countries outside the U.S. — an area that’s very cheap right now and has the potential to perform much better than U.S. stocks over the next five to 10 years. We’ve also added cheaper sectors, like financials and energy.
Surprised by some of this? Don’t worry. This field can be challenging to navigate, but that’s why we’re here. If you’d like to discuss this matter further, simply contact your Redwood advisor.