During their recent episode, Taylor, Carlisle, and Jeff Weniger discussed Why the Magnificent Seven Are Holding Up the Stock Market. Here’s an excerpt from the episode:
[Jeff] Well, sometimes you get the generals get shot first too. That’s how you can see a market deteriorating when the generals start to go. But the generals are the things holding it up.
And the reality is they are such a heavyweight in there. So if you’re doing individual stock selection, you’re probably in a lot of pain, but there’s probably a lot of people that haven’t even noticed that the market’s been deteriorating. I think that one of the things, I mean, I’m looking at my calendar here.
It’s October 6th. What’s happening with portfolio rebalancing this year? Because if you’re in like a 60, 40, right?
So let’s say you’re in a 60, 40, like a financial advisor. And what did we just say? The S&P is up like 12.
Let’s just say it’s up 12. Well, what is the performance year to date on aggregate bonds? I don’t know.
[Tobias] Not great, Bob. I think they’re down. I think they’re being punished.
It’s pat. So that’s like sell stocks into bonds. So you think that rotation, that rebalancing puts some pressure on stocks potentially?
[Jeff] I mean, that’s what I’m getting at is, I mean, I’m just thinking about TLT, which is the long bond. Most people in their 60, 40, in like an advisor capacity, they don’t have TLT. They’ve been shorter duration than the aggregate for years, but nonetheless, three to seven years, five to tens, and corporates, treasuries.
That’s one of the concepts that I think is pretty intriguing is you just naturally in a 60, 40, you might be by accident, 64, 36, or something like that. And it’s getting to that portfolio rebel time. And there is also the other side effect in here that I’m trying to gauge.
I don’t have the answer, guys. Is when it comes to tax loss selling, you got to sell the bonds. That’s the only thing.
I mean, if you’re in generally in cap weighted indexes, despite the fact that Nike is dying on the vine, right? Like talk about Nike and talking about it’s doing poorly. Most people have black ink on the equity side of their ledger.
So I think that there could be a lot of machinations within fixed income portfolios where they can take tax losses on the stuff that’s red ink and then switch to someone else’s competitor product. We’ll see. But that’s the other dynamic here.
I think people are going to have a pretty busy November and December.
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