Are We Sure That Correction Isn’t Occurring Right Now?
A Deceptive Environment Underway
Earlier this year, I talked about how conditions favored the return of volatility in March and continued volatility and a correction in April and into early May. The former mostly happened, although it probably occurred more in the bond market than in equities. A lot of people have come onto my social media timeline and argue that the latter hasn’t.
If you look at the major U.S. equity averages, you could probably make that argument. While there have been declines in stock prices over that time, it’s within the range of what could be considered ordinary market activity.
The pullback in equities looked like it was picking up steam around the middle of April before the heart of the Q1 earnings season lifted risk asset prices back up. As a whole, earnings have looked pretty positive (albeit compared to tepid expectations), but the biggest gains came from the FAAMG names. Facebook rallied sharply after its report. Microsoft did the same. Alphabet saw a solid bounce, although it wasn’t quite as strong as Facebook or Microsoft. Amazon’s stock rose before pulling back. It was a similar theme for a trend that we’ve been seeing play out throughout 2023 - mega-cap growth & tech are driving the market averages higher.
That’s the problem with cap-weighted indexes. They give oversized influence to just a few names and that can mask weakness that can be occurring under the surface. It’s an issue for the S&P 500 where the top 2 names account for 14% of the index and the top 10 are responsible for nearly 30%. It’s worse for the Nasdaq, where more than 50% is tied up in the top 10, or the tech sector, where the number climbs to 70%.
In short, we need to look at more than just the S&P 5 or Nasdaq 10 to see where market sentiment is at. Using the equal-weight versions of the indexes gives us a better proxy of how the broader market is performing at the moment. As would be expected, they performed worse than the cap-weighted averages, but the degree of underperformance has been surprising.
Let’s start with the S&P 100, which is essentially the mega-cap index.
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