Print Friendly, PDF & Email

Executive Summary

As shown in the first graph of the missive this week, only 17% of companies in the S&P 500 have outperformed the index over the last 30 days. The S&P 500 Index is market-cap weighted. However, in the second graph one can see the S&P 500 Index substantially deviated from the equal-weighted S&P. This shows how the S&P 500 is being lifted by a small handful of high-flying stocks. These moves are not broad based. Growth in the economy is slowing, which should be reflected in corporate earnings. Stock prices could see downward pressure.

Please continue to The Details below for more.

“A hot stock, like a hot stove, should be handled with care.”
–Benjamin Graham

The Details

Wall Street legend Bob Farrell established 10 Rules for Investing. Rule number 7 states: 

Markets are strongest when they are broad and weakest when they narrow to a handful  of blue-chip names. 

The broad market index most often quoted is the S&P 500. This index is now more concentrated  than it has been since the peak of the Technology Bubble. As shown in the chart below, obtained  via X and posted by @Kobeissiletter, over the past 30 days only 17% of the roughly 500 index  members outperformed the overall index. In other words, about 415 of the 500 companies  performed worse than the index as a whole. The index is being pushed up by a handful of high flying, overvalued companies. This is not a “broad” market movement and indicates a significant  amount of risk is present.

Another way to show the concentration of the (market-cap weighted) S&P 500 Index is to  compare it to the Equal-weighted S&P 500 Index. The graph below shows the relative  performance of the two indices. Notice a little over a year ago, the S&P 500 Cap-weighted index  began to diverge from the performance of the Equal-weighted index. The gap has become quite  substantial.

Being lifted by the popular high-flyers today adds a level of risk, which will reveal itself when  the current bubble bursts. As the economy weakens and the markets become narrow, it appears  the bear cycle could be ready to roar. Just as the Cap-weighted index has outperformed on the  way up, it will likely lead the descent as the correction ensues.  

Growth in the economy is slowing drastically. In the first quarter of 2024, real GDP grew at a  mere 1.4%. The second quarter started off with high expectations, as the forecast using the  Atlanta Fed’s GDPNow model was for over 4% growth. However, currently, this has been  dropped to a low estimate of only 1.5%. With the economy growing around 1.5% at best, it is  reasonable to expect corporate earnings expectations to fall. Earnings for the second quarter will  begin being released this week. 

High interest rates, debt and inflation are putting the squeeze on consumers. This is filtering  through to corporate earnings. With valuations stretched to the extreme, any disappointment in  earnings could reassert the bear market. 

The S&P 500 Index closed at 5,567, up 2% for the week. The yield on the 10-year Treasury Note fell to 4.27 %. Oil prices increased to $83 per barrel, and the national average price of  gasoline according to AAA rose to $3.51 per gallon.


© 2023. This material was prepared by Bob Cremerius, CPA/PFS, of Prudent Financial, and does not necessarily represent the views of other presenting parties, nor their affiliates. This information should not be construed as investment, tax or legal advice. Past performance is not indicative of future performance. An index is unmanaged and one cannot invest directly in an index. Actual results, performance or achievements may differ materially from those expressed or implied. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy.

Securities offered through First Heartland Capital, Inc., Member FINRA & SIPC. | Advisory Services offered through First Heartland Consultants, Inc. Prudent Financial is not affiliated with First Heartland Capital, Inc.