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Hoosiers are familiar with weather warnings. A tornado watch means conditions are ripe for a funnel cloud. A tornado warning means the funnel has been spotted. Sadly, when it comes to our retirement accounts and potential dangers, we don’t receive similar alerts. I use the word “potential” because watches and warnings don’t always foretell disaster.
There are multiple reasons to be concerned about the current state of U.S. equity markets, including the current season. Summer is historically a poor performing time relative to the November through April period. Additionally, the Federal Reserve is considering raising interest rates. Higher rates usually create a drag on stock prices.
The one factor currently holding the market together is overall prices/valuation. The market continues to remain in “bull mode” technically, and that factor matters more than any other for today’s equity markets. Regardless of fundamentals or what we believe should happen, price retains the controlling vote.
Just as Indiana weather changes quickly, so do the markets. The two issues discussed below are merely warning signs that things could change abruptly. These “alerts” stem from a lack of market participation as measured in terms of breadth and the range between various sectors within our economy.
Alert 1: A few big players. When discussing the S&P 500, keep in mind that it is market capital weighted. The formula for market cap is one share of a company’s stock multiplied by the number of shares outstanding or owned by investors. There are companies with billions of shares outstanding and others with millions so the price of one share tells you very little about market capitalization.
Ideally, we would see a large number of individual stocks listed within the S&P 500 posting new highs when the index reaches new levels. However, that’s not happening at the moment. When we compare the market cap weighted S&P 500 versus the same stocks but equally weighted, we find a vast difference in performance. The equal weight stocks are dramatically underperforming the cap-weighted index, showing that the current market is being led by a handful of very large companies. That doesn’t guarantee gloomy investment weather ahead, but it must change course eventually or other storms will arrive.
Alert 2: Volatile sectors. The S&P 500 index is composed of nine sectors representing different parts of the economy. Variance in returns among these nine sectors is yet another alert. As I write this column, the S&P 500 index is up 3% year-to-date. The healthcare portion is up more than 12% while the energy sector is down more than 9%! Though it is not unusual to see vast differences between the best and worst performing sectors; according to Adam O’Dell, editor of the Cycle 9 Alert, the relative spread between the two coupled with overall meager returns on the index is another indicator that market volatility could be in the forecast. The defensive sectors – the ones that tend to do the best relatively in times of economic struggles – are also the current out performers.
With weather and investing, stay alert to changing conditions.
Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column offset=”vc_hidden-lg vc_hidden-md vc_hidden-sm”][vc_widget_sidebar sidebar_id=”sidebar-main”][/vc_column][/vc_row]