Global Markets Kickstart: Strategy To Reduce S&P 500 Concentration Risk
Strategy To Reduce S&P 500 Concentration Risk
Chart of the Week: Trump 1.0: Core Inflation Stable, 10Y Treasury Yield May Bottom Out
During the 2018 trade war, U.S. inflation rose slightly, with overall CPI climbing from 2.1% at the start of 2018 to 2.8% by June. From July 2018 to March 2020 (pre pandemic), core inflation saw modest growth, averaging 2.2% and peaking at 2.4%. A strong U.S. dollar post 2018 likely offset some tariff induced inflation.
Market Recap:
Bond Yield Declines Support Equities; Tech Stocks See Volatility
Ceasefire Lowers Risk Appetite; Gold and Oil Weaken
U.S. equities benefited last week from a pullback in long term bond yields, with the Dow and S&P 500 hitting new highs amid light trading due to Thanksgiving.
What’s Trending: Crypto Adoption Rises, But Volatility Poses Challenges for Reserve Use
The Trump administration has adopted a more favorable stance on cryptocurrencies, with new legislation promoting Bitcoin and broader cryptocurrency applications. However, laws specifically addressing Bitcoin as a reserve asset have progressed slowly In October, the SEC approved Bitcoin spot ETF options trading, potentially increasing market maker hedging activity. In the short term, Bitcoin’s volatility is likely to remain high, making it a risky option for national reserves. Over the past decade, Bitcoin has experienced three drawdowns exceeding 70%.
In Focus:
Valuations of Equal Weighted Large Cap Index Remain Reasonable
Equal Weighted Index Holds More Diversified Mid to Large Caps
From a fundamental perspective, the traditional S&P 500 index exhibits low equity risk premiums and a high P/E ratio (~27x), exceeding the 30-year average by 1.5 standard deviations, signaling it’s not particularly cheap. The top 10 companies account for over 35% of the index, reflecting concentrated risk, heavily weighted towards the tech sector (32%). In contrast, the equal weighted S&P 500 index holds fewer mega caps and more mid to large cap stocks, with a P/E ratio of ~20x, slightly above the 30 year average of 19.3x. Key sectors include industrials (16%) and financials (15%).
