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Year-to-date the S&P 500 index has gained nearly 15%, hitting an all-time high (again) on Thursday. The artificial intelligence tech giant Nvidia is responsible for one-third of this return. Other mega-cap AI stocks, Microsoft (MSFT), Apple (AAPL), and Broadcom (AVGO) have also been major contributors to this year’s performance. Ostensibly, the market is having a stellar year until you look under the hood of the hood. What you will find is deteriorating breadth which is underwhelming.
Now, another way to measure the broader market, in our opinion, is the S&P 500 Equally Weighted Index. Equally weighted simply means that each of the 500 stocks makes up the same percentage of the index. From this perspective, gains have only been 4.39%, year-to-date. In fact, as of this writing, 210 of the S&P 500 stocks are flat or negative for the year. Moreover, 101 of those stocks have experienced losses greater than 10% in the same period. The percentage of stocks that are outperforming the index is at its lowest level since 1999. In our opinion, this is the classic definition of a narrow market with further evidence being seen in the Volatility index (VIX). Suffice it to say, this kind of market reminds us of how important it is to stay focused on our rules for stock selection.
Bottom line, the headlines don’t always paint the true picture of the underlying market. It’s easy to get caught up in the index numbers constantly being updated on CNBC. The S&P 500 Index is driven by only a few stocks. When those stocks perform well, it gives the impression that the economy and the entire market are healthy and strong. Lest we forget, it is important to understand the fundamentals of equities and our economy. Our research gives us great confidence in saying, the economic landscape has many cracks in its foundation. Holding above average amounts of cash may seem overly conservative, but from our perspective, it’s a prudent strategy, particularly while cash is earning approximately 5%.
Enjoy a wonderful weekend. ~ Roger
*Bloomberg
