The Slippery Slope of the US Stock Market: Exploring Possible Implications
The US stock market has experienced an unexpected negative performance since the beginning of the year, despite the majority of S&P 500 companies posting significant gains. According to Refinitiv data, the S&P 500 Equal Weighted Index is down 0.35% while the benchmark index gained an impressive 9.5%. This stark contrast between the two measures of the same stock market’s performance is an indication of the rapid growth of demand for larger stocks that tend to dominate the benchmark. This article aims to explore the possible implications of this negative divergence and what investors can do to minimize risks.
The Rise of Large Tech Companies: A Double-Edged Sword
The world has seen unprecedented growth in large technology companies such as Nvidia, Microsoft, Alphabet, Apple, Amazon, and Meta. These companies added a colossal $3.1 trillion in market capitalization in 2023, according to data from AJ Bell. On one hand, this is a positive indication of the strides technology is making in our society. On the other hand, the dominance of these large technology firms is significantly affecting market performance, complicating investment decisions.
The Impact of Traditional Safe Haven Assets: US Treasuries and the Dollar
Investors have traditionally seen US Treasuries and the dollar as safe haven assets amid market uncertainties, but things seem to have changed. Even low-risk tech stocks may have started to trade as safe havens. This trend is a testament to the increased rationality in the market, especially given the challenges that U.S. Treasuries and the dollar are experiencing. Despite being affected by doubts, these assets have remained resilient and continue to attract investors.
The Divergence between the Two S&P 500 Indexes and Its Ramifications
The S&P 500 Equal Weighted Index is down 0.35%, and only 12% of S&P 500 companies are outperforming the index on a 60-day trailing basis, the lowest level since at least 1993. This divergence is unprecedented and may result in significant market risks that investors need to consider when investing in the stock market. Market experts have warned that what seems like a calm market currently may be turbulent beneath the surface.
Thomas Mathews, a market economist at Capital Economics, warns that “If we’re right, growth will falter by the end of the year…we suspect there is some pain to come for the S&P 500 and global equities in general”. Investors need to prepare accordingly for a possible downturn in the market.
Summary
In summary, the US stock market has experienced a negative performance year to date, despite impressive gains by most S&P 500 companies. The increasing dominance of large technology firms is significantly affecting market performance while complicating investment decisions. Even low-risk tech stocks may have started to trade as traditional safe haven assets like US Treasuries and the dollar, both beset by doubt. With only 12% of S&P 500 companies outperforming the index on a 60-day trailing basis, market risks for investors have amplified. It’s essential to prepare for the eventuality of a downturn in the market and diversify one’s portfolio to minimize risks.
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By at least one measure, the US stock market has slipped into negative territory since the beginning of the year.
The S&P 500 Equal Weighted Index, which gives equal value to each stock, is down 0.35% since January, data from Refinitiv show. This is in stark contrast to the 9.5% gain for the S&P 500 benchmark, where companies with larger market capitalizations make up a larger share of the index.
While larger gaps have previously opened up between the two measures of the same stock market’s performance, “there has never been such a strong negative divergence,” said Manfred Hübner, managing director of research house Sentix.
The rapid growth in demand for larger stocks explains the difference. Riding the AI wave, Nvidia, Microsoft, Alphabet, Apple, Amazon and Meta added a total of $3.1 trillion in market capitalization in 2023, according to data from AJ Bell. Ignoring their contributions, the S&P 500 has lost $286 billion so far this year.
Even high-quality, low-risk tech stocks may have started to trade as traditional safe haven assets like US Treasuries and the dollar, “both beset by doubt,” said Erik Knutzen, multi-asset class chief investment officer at Neuberger Berman . “Perhaps market participants are more concerned than it appears,” he said.
Excluding volatility in food and energy prices, core inflation remains stubbornly sticky, suggesting the US Federal Reserve may have to keep raising interest rates or keep them “higher for longer” to engineer a recession over the next 12 months .
Only 12% of S&P 500 companies are outperforming the index on a 60-day trailing basis, the lowest level since at least 1993, according to Liz Ann Sonders, chief investment strategist at Charles Schwab.
Quoting actor Michael Caine, Sonders said the surprisingly lively S&P 500 now resembles a duck: “calm on the surface but rowing like cocks underneath.”
The bull runs in the late 1990s and between 2019 and 2021 were similarly driven by a handful of the largest companies, said Thomas Mathews, a market economist at Capital Economics.
This latest bull run slowly widened as investors grew more confident about the state of the U.S. economy post-pandemic, then eased as interest rates started to rise in 2022. Equity markets reversed sharply when the dotcom bubble burst.
“If we’re right, growth will falter by the end of the year. . . we suspect there is some pain to come for the S&P 500 and global equities in general,” Mathews said.
https://www.ft.com/content/6021d049-e437-4c3f-b899-2bff66ab5cae
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