The year 2021 has started where 2020 ended: high levels of market volatility, continued massive fiscal stimulus and rising interest rates.
With so much change and uncertainty in the financial markets, it’s easy to lose your head and start focusing on daily news headlines.
Keeping the long term in mind and ignoring the noise is simple but not easy to implement in practice. Seeing your portfolio reaching new highs, only to see the paper profits evaporate in a multiweek period, is discouraging for even the most seasoned investors. It is important to slow your thinking during these periods and focus on the bigger picture.
Year to date, the Nasdaq is up about 5%, and the Dow Jones Industrial Average is positive approximately 8%. This is a reversal from 2020, where the Nasdaq was positive about 45% and the DJIA only increase approximately 6% from Jan. 1 through Dec. 31.
The Nasdaq has a concentration of 47% in information technology while the Dow Jones is more heavily weighted toward industrials and financials, with only about 20% exposure to information technology. While the rotation from growth to value happened in a period of less than a month, it reflects the reality that the Nasdaq’s outperformance was unlikely to continue at such a high rate indefinitely.
Tech and the 10-Year Treasury
One of the primary drivers of the rotation is the continued progress toward reaching herd immunity to COVID-19. As the number of people vaccinated grows, and more vaccines pass approval processes, investors are starting to look forward to a post-pandemic world. As the recovery takes hold, and people return to normal life, interest rates have risen rapidly in anticipation. The 10-year Treasury went from 0.93% on Dec. 31 to 1.69% on April 1.
Although low by historical standards, going back to 1960, there have been 13 periods in which the 10-year Treasury increased by at least 1.5% . Importantly, rising rates and a steepening yield curve are signs that economic growth expectations are picking up, not that rampant inflation is coming.
The logic follows that pandemic-hobbled industries, such as airlines, banks, leisure and hospitality are rallying, while pandemic winners that focus on technology are giving back some gains. Higher interest rates tend to benefit financials that can lend out money and charge higher interest rates. The market pullback is therefore rational and a sign of overall market health.
The gains localized in technology and companies focused on connecting the world digitally are spreading to a broader swath of companies more representative of the overall economy. Along the way, there were certain rapid growth industries such as software-as-a-service where valuations reached levels similar to those of the dot-com era. Those areas of the market have been hit very hard, with some companies, including Snowflake (ticker: SNOW), Palantir Technologies ( PLTR), Fastly ( FSLY) and Zoom ( ZM), off substantially from their all-time highs.
Focus on the Long Term
Investors need to think long-term when it comes to their investment decisions. It’s highly unlikely that banks, internal combustion engines and commercial real estate are going away anytime soon. However, as the post-pandemic world takes hold, it is unlikely that the world will return exactly to the way it was before.
Secular trends that were already growing, such as e-commerce, were accelerated during the pandemic and are likely to continue to penetrate market share over time. The inevitability of software and cloud infrastructure playing a bigger role in the world economy is likewise unlikely to reverse course.
The world is changing more rapidly than in the past, and the market is starting to price in what this new world looks like. Ensuring that you have a balanced, long-term approach is critical to avoid chasing short-term performance or letting headlines disrupt your strategy.
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Managing Your Portfolio During Times of Rapid Change originally appeared on usnews.com