I went Halloween shopping last week, but I didn’t see anything scarier than the chart below (and I bought zombie babies, people). The horizontal numbers on the right measure the drawdown of the S&P 500 year-to-date 2021, as graphically depicted by the yellow line. The horizontal numbers on the left show that nearly 90% of the indices’ members have already had at least a 10% correction year-to-date, as graphically depicted by the blue blob. The result is that it’s been a good year for you if you’ve held the S&P 500. However, because a substantial amount of the index’s underlying components have cracked more, we must remain vigilant in tracking when the stock market might break.

For now, the signs are ominous but not immediate. I bring this up because I’ve heard people suggest that investors immediately sell stocks in the Technology sector. The reasoning, in part, is emotional — people often sell stocks in response to their prices dropping. The more rational reason is that selling has occurred in the Technology sector because interest rates have drifted up. Specifically, the 10-year Treasury note hit a low of 1.18% on July 20, 2021, and has since risen higher than 1.5%. The textbook trade for rising rates has been to sell growth stocks, like those in the Technology sector, and buy stocks of companies in the Financial and Energy sectors.

I don’t often overweight the Energy sector by much. Energy comprises less than 3% of the S&P 500 and about 2% of the Dow Jones Industrial Average (DJIA), by market capitalization. I totally admit to my wimpiness in this regard. Suppose I bulked up my portfolio to triple the weighting of the broader averages. In that case, Energy stocks would still need a major return to generate enough alpha to be worth the risk. I may do so in the future, but I don’t try to be a hero with my money, so I don’t have that trade on my radar screen right now.

By the way, I admit that it was my mistake (if you want to call it a mistake) not to overweight Energy stocks in 2021. The sector has doubled the return of the S&P 500 year-to-date. If I had tripled the Energy allocation in my portfolio, that would have resulted in a bit more than one extra percent of return to my portfolio. Wait. What? Yup, that’s the math. Even when Energy stocks are ripping ahead of the general market, you need an outsized allocation to significantly affect your portfolio returns.

My wimpiness aside, the question remains: “Should we reduce our technology allocation if we expect interest rates to continue to rise?” To be nuanced, it matters why rates are rising, to what level they may rise, and how long will it take? Let’s speak generally. Rising interest rates are a sign of an economy whose growth is becoming more sustainable. Technology stocks often become more attractive when rates fall because that’s sometimes a sign of slowing economic growth. In response, investors are willing to pay a higher price to buy a company with its own non-correlated growth. Conversely, Technology stocks become less attractive when interest rates rise.

Readers may recall that on April 5, 2021 , “in a few tiny spaces, I shifted some large-cap growth broadly and technology stocks specifically into large-cap value stocks. I also placed some of the proceeds into high-yielding corporate bonds (aka junk bonds).” However, that was not abandoning Technology stocks — that was reducing an already overweight exposure.

Although the popular trade is becoming to sell Technology stocks, I don’t intend to join the cool kids on this adventure. Energy stocks may continue to rip higher, and I’ll feel left out with my wimpy market weighting. However, I am hesitant to follow those selling Technology stocks. I tend to buy stocks through Exchange Traded Funds (ETFs) that carry a basket of stocks, including those in the Technology sector. By virtue of those companies making it into the indices tracked by the ETFs, I’d contend that they could be categorized as best-in-breed.

In addition to Financials and Energy stocks getting a lift from rising interest rates, Industrial stocks could benefit from massive infrastructure spending. There’s a lot of places to put your investment dollars. All I ask is that you don’t be too quick to sell off some of these best-in-breed Technology stocks that may be in your portfolio. People aren’t going to stop using Microsoft products, ditch their Salesforce CRM, hang up on their Apple phones […]

source CAPITAL IDEAS: Here’s what retirement looks like

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