US Investors Face Concentration Risk Amid Global Outperformance

Key Quotes

"Seventy percent of international markets last year outperformed the US. US investors are virtually unexposed to those markets, a lack of diversification in their portfolios. So I like the momentum of the market, I like where it's going, but I think there are lots of areas where people need to go, whether it's in pharmaceuticals, whether it's in energy, whether it's in MLPs, where there's simply no real action on the part of investors."

David Bahnsen argues that US investors are missing out on international market growth due to a lack of diversification. He highlights that many international markets outperformed the US, yet US portfolios remain largely unexposed to them. Bahnsen suggests that while the overall market momentum is positive, investors are overly concentrated in specific sectors, neglecting other areas with potential.

"That is the number one thing that we're talking with clients about today, is the fact that if a client has multiple advisors, and they're all investing in the same thing, and they don't rebalance portfolios, that is the number one observation that we've seen in our data this past year, is that everyone is letting these trades ride."

David Bahnsen points out a critical issue for clients with multiple advisors: a lack of portfolio rebalancing leading to concentrated risk. He observes that investors are allowing existing successful trades to continue without adjusting, creating a significant risk in their portfolios. Bahnsen emphasizes that this concentration is the primary concern he discusses with clients.

"The average family has more than 9% of their portfolio in cash and has had it there for basically five to ten years, saying they'll be opportunistic, and they never are. The average cash yield for that family is 2.7%. They could be earning 4% in treasuries, they could be earning 5% if they have a blended portfolio."

David Bahnsen highlights that many families hold a significant portion of their portfolio in cash for extended periods, intending to be opportunistic but failing to act. He contrasts the low average yield on this cash with the higher potential returns available from treasuries or blended portfolios. Bahnsen suggests this represents a missed opportunity for investors to increase their overall returns.

"I think if you believe that the economy is in a decent place, you believe we're going to get fiscal stimulus coming through this year. We see unemployment behaving itself per your earlier comments just now. If we see the impact, which is always delayed, of the Fed cuts coming through and actually supporting the economy, which we think they will, then if you look back through history, nine times out of ten in a year with no recession, and we're not calling for a recession, we think the odds are pretty low, then the S&P delivers positive total returns."

John Bilton suggests that a positive economic outlook, supported by fiscal stimulus, stable unemployment, and the delayed impact of Fed cuts, historically leads to positive S&P returns. Bilton indicates that in years without a recession, which he believes has low odds, the S&P has delivered positive total returns approximately nine out of ten times. He advises against betting against stocks given these favorable historical odds.

"The push up in commodity prices is a symptom of the investment that's being made, and the investments that are being made at the moment are in building productive capacity. It's in electrification, which will ultimately bring down costs. It's also in data centers, which is a huge part of the AI infrastructure build-out. We're going through a massive building phase at the moment, a phase where we're building productive capacity, and we know that the biggest driver of total factor productivity over the long run is the investment made in those productive assets."

John Bilton explains that rising commodity prices are a result of significant investment in building productive capacity, such as in electrification and data centers for AI infrastructure. Bilton posits that this massive building phase, focused on productive assets, is the primary driver of long-term total factor productivity. He views current commodity price increases as a symptom of this larger investment theme.

"The best that they could do is extend the ACA subsidies that expired at the end of last year. 24 million people, some people paying $1,000 more in ACA subsidies. That's going to be the bulk of it. And the real news from that event yesterday was around the Hyde Amendment, which is related to abortion. We're on the same old issues we've been focusing on for 16 years. So expecting radical change on the healthcare front is just unrealistic."

Henrietta Treyz states that due to a narrow Republican majority, the most achievable action on healthcare is extending expired ACA subsidies, which would benefit 24 million people facing higher costs. Treyz notes that the focus remains on long-standing issues like the Hyde Amendment, making radical healthcare reform unlikely. She concludes that expecting significant changes in healthcare policy is unrealistic given the current political landscape.

"The president's commentary shows that there is honestly kind of gaslighting going on within the White House. And I would start with the tariffs. The tariffs are widely understood by the American public. Everybody watched the news on Liberation Day, and every small business that's importing anything, whether it's a children's toy or a refrigerator, is focused on what happens next. What happens at the Supreme Court? Do I need to pay this harmonized tariff schedule number? What's my tariff rate? Every single person in the United States is concerned about tariffs, and they do not like them."

Henrietta Treyz suggests that the White House may be misrepresenting the public's view on tariffs, which she states are widely understood and disliked by Americans. Treyz highlights that businesses importing goods are directly concerned with tariff rates and potential Supreme Court decisions affecting them. She asserts that tariffs are a significant concern for nearly everyone in the US and are unpopular.