This hasn’t happened to U.S. stocks in more than 20 years – here’s why investors should be concerned
The U.S. stock market is currently experiencing a phenomenon not seen in over two decades: a persistent decline in the breadth of its equities amid rising major indices, particularly the S&P 500. This unusual trend raises concerns among investors about the market’s overall health and sustainability. As of Thursday’s close, the proportion of stocks in the S&P 500 that are falling has surpassed those rising for nine consecutive sessions, according to Jonathan Krinsky, a technical strategist at BTIG. Such an extended period of negative breadth has occurred only once in recent history—surrounding the tragic events of September 11, 2001.
What is “bad breadth” and its implication?
Breadth in the stock market refers to the number of stocks that are participating in a rally or downturn. Typically, a healthy market expansion is marked by a broad increase, with numerous equities rising alongside major indices. The current scenario, however, showcases a dominant performance by a select few megacap technology stocks—often referred to as the “Magnificent Seven” (including giants like Apple, Amazon, and Microsoft)—which have been pivotal in compensating for the lack of participation from other sectors.
Since the beginning of December, while the S&P 500 has recorded a modest gain of 0.4%, a more equal-weighted measure of the index, such as the Invesco S&P 500 Equal Weight ETF (RSP), has suffered a notable decline of 2.5% during the same period. This ETF has experienced a nine-day losing streak—the longest since Christmas Eve 2018, a time characterized by significant market sell-offs.
Historical Context and Current Positioning
Historically, episodes where breadth is this dire have occurred when the S&P 500 is well below its record highs. According to Jason Goepfert, a senior research analyst at SentimenTrader, there have been fewer than 20 similar instances in the past 70 years, with an average occurrence when the index was about 12% below its peak. As of now, the S&P 500 is only 0.6% away from its all-time high of 6,090.27, a situation that presents an unprecedented context for current breadth weakness.
Volatility on the Horizon?
As the market navigates through this contrasting landscape, experts are beginning to anticipate increased volatility. Krinsky suggests that this period may serve as a precursor to broader market correction as investors start to cash in their gains. The sell-off witnessed on Monday, impacting major momentum stocks such as Palantir Technologies Inc. (PLTR) and AppLovin Corp. (APP), might be indicative of a shift where capital rotations are prompting volatility.
Additionally, the S&P 500 Value Index (SPYV) has also experienced its own drop, recording a historic nine-day losing streak, presenting a stark contrast to the performance of the growth-focused segment of the market. This divergence between value and growth stocks further complicates the current market outlook.
Looking Forward: Trends and Total Returns
Despite these concerning trends in breadth and the disparity among stock performances, the S&P 500 is projected to achieve a total return exceeding 25% by the end of 2024, a feat not recorded in two consecutive years since the late 1990s. Such optimistic projections, backed by solid fundamentals, may reassure investors—yet the rising divide within the market continues to provoke anxiety over its robustness.
Conclusion
As we head toward a new year, market participants must be cognizant of the risks associated with this current breadth deterioration. The declining breadth, coupled with the increased volatility, could challenge previously held convictions about the stock market’s trajectory. Investors would do well to keep a vigilant eye on both index performances and the sectoral disparities that characterize today’s trading environment. Understanding these dynamics will be crucial for navigating the evolving landscape of U.S. equities as 2024 unfolds.
