Bear Market in Diversification

By Matthew Gutierrez and Shawn O'Malley · June 10, 2024

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Cash is sorta king, right? Our friends over at The Wall Street Journal noted that investors parking cash in money-market funds last year “reaped around $300 billion in interest income — more than in the prior decade combined.”

According to the Federal Reserve, households now have over $4 trillion in checkable bank deposits — a staggering four times higher than pre-pandemic levels.

So, while Americans’ low-savings rates have made headlines, it’s worth a harder look. Maybe it ain’t necessarily a negative. “Elevated net worth supports a low saving rate,” Deutsche Bank’s Matthew Luzzetti wrote to investors.

As another analyst noted, “When you are ‘loaded,’ you have less reason to save. If my stock portfolio is rising and home prices are climbing, I don't feel like I need to be saving as much.”

— Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the biggest stories in markets:

• Beneath the calm, stocks go haywire
• The great bear market in diversification

This, and more, in just 5 minutes to read.

POP QUIZ

?Nvidia has split its stock 10-to-1. S&P 500 companies that have split their stocks since 1980 have outperformed the overall index by how much over 12 months following the split? (Scroll to the bottom to find out!)

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In The News

??Beneath the Calm, Markets Go Haywire

The S&P 500 index keeps chugging higher, quite calmly. But underneath the surface, individual stocks are swaying rather drastically.?

The S&P 500 has had few large daily moves recently. There hasn't been a 2% move since February, and the VIX gauge of expected volatility is only slightly up from the post-pandemic low reached last month.

A smooth sea anomaly: Yet many individual stocks have experienced big swings of 10% in a day over the past three months. As The Wall Street Journal reports, only once in the past 25 years have stocks swung about like this while the overall market stayed so calm.

• For example, Salesforce fell 20% and HP soared 17% on the same day at the end of last month, and Hewlett Packard Enterprise, a spinout from HP, jumped 11% last week."

The longest stretch this year without a 1% move in the S&P was 15 trading days. Why?

For starters, investors are trying to pick winners and losers amid higher interest rates and AI euphoria, and they (evidently) see little risk out there. However, as WSJ warns, "the bigger risk is that “ investors get too comfortable with the idea that there are no imminent threats."

Reasons for the divergence: The "two-speed economy" and excitement about AI are causing investors to rotate heavily into and out of certain stocks based on their perceived winners and losers.

• As one managing partner observed, "There are enough stocks that do well or badly from interest rates to move share prices around a lot, but they largely cancel out at the index level. This shows up in stock options that are priced for very low correlation between them—the lowest for the year ahead since at least 2006.”
• Another noted, "As for AI, the bet is about who the winners will be, with little evidence yet of who will lose. But hopes for AI have led to huge gains for the AI leaders, especially chip maker Nvidia."

Why it matters:

Investor enthusiasm has stayed strong this year. There’s a consensus among investors that major risks are limited, at least for now.

The Wall Street Journal reports that “investors widely agree that the big bout of inflation is over, that the economy will be neither so hot nor so cold that the Federal Reserve will have to make major changes, and that wars in the Middle East and Ukraine are contained."...