From the desk of Willie Delwiche.
JC and I were talking about the market last week in one of our town hall meetings.
“It’s a market of stocks,” he said, offering up the old Wall Street adage about looking at market health by looking beneath the surface.
I don’t dispute the wisdom embedded in that comment. It’s an adage for a reason.
But my response to JC was, “No, it’s a market of sectors.”
Let me explain…
Sector-level trends are the dominant themes right now. Index-level analysis obscures this, as does a bottoms-up, stock-centric approach that only takes the data back to the level of the index.
We can see it when looking at the sectors (individually or in combination) on an absolute basis. Technology and Consumer Discretionary are both down over the past three months, while four sectors (Energy, Financials, Materials, and Industrials) are all up over 13% in that time period. The percentage of stocks in our Value sector composite (made up of Industrials, Financials, and Materials) above their 200-day averages is holding steady at 98%.
The percentage of stocks in our Growth sector composite (made up of Technology, Consumer Discretionary, and Communication Services) above their 200-day averages is 84% and falling. Value sectors were recently seeing record numbers of stocks hitting new 52-week highs, while Growth sectors are being monitored for evidence that new lows are expanding.
We can look at it as a market of sectors on a relative basis as well. The ratio between Technology and Financials is just one example. After an impressive 15-year display of strength versus Financials, Technology has started to meaningfully deteriorate and is now at its lowest level in a year.
This is a dramatic example, but it’s going to be an important one for investors going forward.
The problem for the indexes, and the passive investors that are benchmarked to them, is one of size. The deteriorating Growth sectors account for 50% of the market cap of the S&P 500. The relatively strong Value sectors make up just 25% of the index by market cap.
We still want to look beneath the surface and balance price and breadth to get a sense of market health. That becomes difficult in aggregate when sector-level trends show such wide discrepancies. So yes, it’s a market of sectors right now, but don’t forget that those sectors are made up of stocks.
Whether our focus is individual stocks or entire sectors, let’s make sure we are listening to the messages the market is providing.