Shifting Currents, Steady Hands
The calendar turned to 2025, and boy, did the market environment pivot with it.
Just three short months ago, the Market was enamored with the Magnificent 7, AI, and the future prospects for growth — animal spirits were out in full force. Weights in the indexes of the top holdings had moved to levels never seen before. Concentration risk became so high, we flagged it as one of the major risks for the year.
The first quarter saw part of the unwind of this concentration risk, as selling has been steady and firm in the Mega Cap Tech stocks, and rotated into other areas of the Market almost abandoned last year.
With the major market indexes red on the year, would you believe 7 of 11 sectors were green in the first quarter? Investors in Energy, Health Care, Utilities, Consumer Staples, Financials, Materials, and Real Estate wouldn’t know the major indexes have been weak at all. This move is a reminder that there are indeed investable areas outside the Mag 7.
In fact, the only sectors that were deeply negative in Q1 were Consumer Discretionary and Technology. Industrials & Communication Services were just down a touch. Those four sectors represented over 60% of the S&P 500 entering the year, disproportionately taking it lower in Q1 2025, just as they took it higher in ’24.
The past 48 hours have clearly changed things in rapid fashion.
Another example of the positioning unwind is Growth Stocks, which are -19% on the year, while Value Stocks are -6% after this week’s steep sell-off. High Beta (higher risk) stocks are now down a staggering -23% on the year, while Low Volatility stocks are amazingly flat. The Magnificent 7, when basketed together, are now -24% year to date, taking the brunt of the selling. The rotation to safer, more appropriately valued parts of the Market has been the theme in the first quarter, and we have plenty of that in our portfolios.
We were ready for this possible shift, and as outlined in our 2025 Outlook presentation, we were focusing on the other 493 stocks in the S&P. It’s benefited portfolios greatly.
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