Announcements of better-than-expected 1st quarter corporate earnings continue to drive stocks higher this week, reflecting optimism despite ongoing geopolitical risks. In fact, there is clearly a lot of FOMO in the markets now – Fear Of Missing Out – as many investors are afraid of becoming too defensive due to the conflict in Iran and its impact on energy supplies. As we talk to portfolio managers and analysts, one of the most common phrases we hear is, “Once this is over…” followed by discussions of various tailwinds for US growth for the remainder of the year.
The April rebound in the markets has essentially wiped-out stock losses from March, but bonds remain relatively flat. In the chart below, we see bonds (US 10-year treasury) in red, with the Dow in blue, the total US stock market in green, and international stocks in pink.
The Fed met this week and decided to leave interest rates as they are for now due to uncertainty created by the war in the Middle East.
On another note, we’re watching a couple of concentration risks that continue to develop in both the markets and the economy. In the stock market, just 10 companies now reflect almost 40% of the value of the S&P 500 and 33% of total earnings (profits).
Source: JP Morgan
This makes for a historically concentrated stock market that becomes very sensitive to the performance of a handful of companies in the same sector.
On the economic front, we’re seeing the US economy becoming increasingly dependent on the spending of the top 10% of income earners, with 45% of personal spending driving the US economy coming from this relatively small group.
Source: Moody’s Analytics
While each of these trends towards greater concentration have very different drivers and overall implications, increased volatility in the markets is one likely outcome for both.
I don’t plan to send an email next week as several members of our team will be attending the annual Raymond James National Conference for Professional Development in Las Vegas.
Have a great weekend.
Jack C. Harmon II, CFP®, CIMA
Principal, Harmon Financial Advisors
Registered Principal, Raymond James Financial Services
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