Everyone and their mother is – or should be – talking about low breadth in the US stock market.
Whether it’s Nvidia breaking away from its peers, or the unprecedented divergence between the equal-weighted and market-cap versions of the S&P 500, the price action over the past month has been remarkable and unique.
We haven’t had a four-week span where the US stock market has gone up so much with so many stocks within the market going down, based on data going back to 2002.
(The S&P 500 cumulative advance-decline line is the running total of the number of stocks that rise versus fall each day).
The cumulative advance decline line is down by over 1000 during a period in which the S&P 500 rose 2.4%. There really isn’t anything close in the past 20+ years – not even if you chop each of these moves in half.
History isn’t really instructive in navigating these waters. There’s an inherent tendency to think that gaps like these must resolve themselves: either by megacaps correcting downward, or by the rest of the index zooming higher while those names take a breather.
But even though investors haven’t faced a market particularly like this, its closest cousin (still a distant relative) happened just last May, when the S&P 500 rose 0.9% in a four-week span while the cumulative A/D line contracted by nearly 1000.
The “why” and “how” looks similar now to then, in broad strokes.
Nvidia effectively kicked off the AI boom in May 2023, and more recently has reaffirmed this as a catalyst for continued eye-popping operating performance. Meanwhile, the Citi US economic surprise index, which measures the extent to which incoming data are exceeding or falling short of economists’ expectations, dipped into negative territory in mid-May 2023. It has dropped sharply over the past two months and is now at -20.
During that four-week span ending May 26, 2023, the S&P 500 outperformed its equal-weight counterpart by nearly 4%. And the gap didn’t really close – not violently, at least. The equal-weight S&P just rose a little more than the market-cap version over the next four and eight weeks.
Two things that are still true of the investment landscape: profit growth is still expected to be hyper-concentrated in the mega-caps (at least for the next couple quarters). And there’s little worry that the US economy is falling off a cliff; 2024 GDP growth estimates have been stable at 2.4% for the past six weeks.
If both those continue to hold, the dramatic divergence we’ve witnessed in the past month need not end with a bang. Just because we’re in uncharted waters doesn’t mean we’re heading for a waterfall. It could end up being a lazy river.
