June 25 2020: Disconnect?


The most frequent question we have received in recent weeks is, “Is the stock market overpriced?”  Many believe there is a disconnect between a horribly performing economy and a strong partial recovery in the stock market following a five-week S&P 500 decline of 34% in February-March.

As investor Howard Marks likes to say, things in the real world generally fluctuate between “pretty good” and “not so hot.”  But in the world of investing, our minds perceive things as fluctuating between “flawless” and “hopeless.”

The pendulum of investor psychology continually swings between these extremes; it just seems to be swinging much more quickly these days!

The Haves and Have-Nots

In a continuation of a trend that existed prior to this year’s events, the stocks of large technology companies have left the stocks of many other companies behind.  As The Wall Street Journal reported yesterday, the divergence in the performance this year of the three major U.S. stock market indexes, the Dow, the S&P 500, and the Nasdaq, is the widest it has been in more than a decade.

The surge in the stocks of large technology companies has driven the technology-heavy Nasdaq index to a year-to-date gain of 10% while the S&P 500 and Dow have declined 5% and 10%, respectively (performance figures through June 24).

Through June 24, year-to-date stock gains for large technology companies are 48% for, 26% for Microsoft, 23% for Apple, 14% for Facebook, and 7% for Alphabet (Google).  The strong stock performance of these giant companies has significantly boosted the results of the Nasdaq and S&P 500.  As reported by SentimenTrader, the technology sector now comprises 27% of the S&P 500 index, its highest weighting in the index since the technology stock bubble days of late-1999 and 2000.

Beneath the surface, other parts of the stock market, many of which are more dependent on a healthy economy, are still suffering.  Vanguard’s index fund tracking the stocks of companies based in developed economies outside of the U.S. is down over 11% thus far in 2020, while the S&P 600 index of smaller U.S. company stocks is down over 21%.

Given large technology companies’ enviable profitability and growth, their stocks arguably deserve to trade at a premium to the rest of the market.  We believe, however, that the stock market recovery will be healthier and more sustainable if it is able to broaden to include other companies.  While we felt nearly everything was on sale in March, more recently we have been trimming our stock investments that hold the strongly-performing large technology companies.

Triple Threat

Our biggest concern for savers and retirees is that we are back to an expected prolonged era of extremely low interest rates.  Fed Chairman Jay Powell recently said that “we are not even thinking about thinking about raising interest rates.”  This leads to low yields on savings accounts, CDs, money markets, and safe bonds.

Savers and retirees continue to face the unpalatable choice of accepting low returns on safe investments, perhaps for the foreseeable future, or taking more risk in search of higher returns.  Ben Meng, chief investment officer of Calpers, recently described the challenge facing investors as a “triple threat of low interest rates, high asset valuation and low economic growth.”

We are living through a period of high uncertainty.  Rather than attempt to predict the future course of events, we will stick to our knitting.  We will continue to hold several years’ worth of cash flow needs in more stable investments for our retired clients, and we will await future swings in the pendulum to try to help your results through rebalancing.


Langley, Karen. "The Big U.S. Stock Indexes Are Telling Different Stories." The Wall Street Journal, Updated June 23, 2020 5:52 ET. Web. 24 Jun. 2020.

Goepfert, Jason. "Buffett scorn reflects a market heavily weighted toward tech." SentimenTrader Blog, 2020-06-23,

Meng, Ben. "Calpers Prepares for the Long Haul." The Wall Street Journal, June 14, 2020.  Web 24 Jun. 2020.


Past performance does not guarantee future results.  Investment strategies discussed may not be suitable for all investors.  Diversification does not guarantee against investment loss.  The information provided here is for general informational purposes only.  The inclusion of specific securities within the context of broad economic commentary is not intended to be a recommendation.  Investors should thoroughly evaluate any security before taking action.  International investments involve special risks, including currency fluctuations and political and economic instability.  Opinions expressed are subject to change without notice in reaction to shifting market conditions.  Data contained herein is obtained from what are considered reliable sources.  However, its accuracy, completeness or reliability cannot be guaranteed.


March 12, 2020: Is This Time Different?

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