https://www.morningstar.com/markets/markets-brief-your-portfolio-is-more-concentrated-than-you-think
First, though, is a look at what the huge rally in Nvidia and other big semiconductor stocks has meant for investor portfolios. Many investors may not realize just how big a bet they are making on this volatile sector. Finally, a research note from the San Francisco Federal Reserve offers thoughts about another important consideration: the correlation between stocks and bonds.
What do semiconductors have in common with railroads? They’ve seen two of the biggest industry concentrations in stock market history, according to the CRSP Stock Database. And semiconductors are well ahead of the telephone boom of the early 1930s.
Nice graphic at link.
This means investors should buckle up for a bumpy ride. Most portfolios—especially those with index funds—now have their largest exposure to a group of stocks prone to significant ups and downs in both the short and long terms.
Investors primarily manage stock market volatility by counterbalancing it with a bond portfolio. That works fine when stocks and bonds move in opposite directions. But as investors found out the hard way in 2022, it’s painful when a bear market in stocks coincides with a big selloff in bonds. The relationship between stocks and bonds is a key factor in the benefits of basic portfolio diversification, like 60/40 portfolios, which hold a blend of the two investment types.
The good news for portfolio construction is that over the last few years, bonds and stocks have gone back to a strong inverse relationship. But why? A recent article by Thomas Mertens, associate director of research at the Federal Reserve Bank of San Francisco, dug into stock and bond market correlations, whether the economy is driven more by demand-side trends or supply-side dynamics, and what that means for the outlook.
Intuitively, higher demand leads to more economic activity and higher prices, resulting in inflation. Higher economic activity tends to raise stock valuations, while higher inflation tends to boost bond yields, leading to a positive stock-bond correlation. A negative shock to supply, on the other hand, makes goods scarcer, leading to lower economic activity but higher prices. While stock valuations decline due to lower activity, inflation raises bond yields, such that the comovement of stocks and bonds is negative.
In line with the negative stock/bond correlation, the 1990s marked a transformative era in information technology, leading to significant investment. After the dot-com boom ended, these supply-driven developments gave way to more pronounced demand-side risks.
oil supply shocks can lead to a negative stock/oil correlation.”