Asset Allocation Video

What Does Our Underweight to Stocks Really Mean?

May 26 2021

Our Asset Allocation Committee recently decided to rebalance some money out of stocks, which look less attractive after a strong rebound since the lows of last March.

Our measures of investor sentiment are flashing red (meaning investors may be overly optimistic on the markets). As we often do, we want to follow the general market principle of buying low and selling high. This means we now have a modest underweight to equities relative to bonds and cash.

But I want to clarify what we mean when we say we’ve moved underweight stocks. Sometimes when I talk in the media about underweighting stocks, the headline becomes that we don’t like stocks. The misleading implication is that we’re telling investors to get out of stocks completely. That’s absolutely not the case.

First, this is the view of our Asset Allocation Committee. We don’t have a house view at T. Rowe—we value a diversity of opinions. My colleagues running our equity strategies are highly skilled at what they do, and they are finding opportunities in stocks across the investing universe.

Second, this is an incremental move to underweight. As an example, if we were looking at a 60:40 portfolio of stocks and bonds, we would consider reducing the stock allocation by a small amount, say one percentage point, to invest the proceeds in cash or low-duration TIPS; in other words, in dry powder.

As one of my fellow asset allocation committee members put it: This is the art of gliding down risk, if you will, in aiming to be less vulnerable to a sell-off. As asset allocators with a six- to 18-month horizon, we still believe in the recovery trade, mainly through relative value positions, for example, Value vs. Growth, Small vs. Large, Bank Loans vs. Investment-Grade Bonds, and Emerging Markets vs. Developed Markets Stocks.

Rising interest rates, higher inflation, and positive economic growth could boost value stocks further. While the shortage of vaccine supply is a headwind for emerging markets, these regions have greater exposure to value-oriented cyclical sectors like financials and industrials, which might benefit as economies fully reopen.

In other words, we are looking to find the best spots to participate in an economic acceleration caused by the reopening and massive stimulus measures. We believe that the macroeconomic environment remains strong and earnings could continue to surprise on the upside.

As I often say in these videos: I believe in the importance of staying invested and staying diversified.

Thank you.

Key Insights

  • Our Asset Allocation Committee recently moved to an underweight in stocks, but what does this mean for investors?
  • We still believe in the recovery trade, but investor sentiment may be overly optimistic, and we are aiming to be less vulnerable to a sell-off.
  • We are incrementally rebalancing some money from stocks and are seeking cyclical exposure to asset classes poised to benefit as economies fully reopen.

60/40 hypothetical portfolio example is for illustrative purposes only.

Risks: Investments in bank loans may at times become difficult to value and highly illiquid; they are subject to credit risk such as nonpayment of principal or interest, and risks of bankruptcy and insolvency. The value approach to investing carries the risk that the market will not recognize a security’s intrinsic value for a long time or that a stock judged to be undervalued may actually be appropriately priced. Small-cap stocks have generally been more volatile in price than the large-cap stocks.  International investments can be riskier than U.S. investments due to the adverse effects of currency exchange rates, differences in market structure and liquidity, as well as specific country, regional, and economic developments. These risks are generally greater for investments in emerging markets. Diversification cannot assure a profit or protect against loss in a declining market.

Important Information

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are those of the authors as of May 2021 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

This information is not intended to reflect a current or past recommendation concerning investments, investment strategies, or account types, advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Please consider your own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy. Actual future outcomes may differ materially from any forward-looking statements made.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only.

T. Rowe Price Investment Services, Inc.

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