At the time of writing, the S&P 500 index closed 1.8% lower, and my social media feed is filled with panicking tech investors. It’s hard to blame them, with names such as Intel and Reddit dropping roughly 30% in a single day.
With Anthropic’s numbers out in the wild and Blackstone warning the market that the House of Claude may receive a junk credit rating, there are jitters everywhere. And it’s about time too, frankly.
But what does a deeper look reveal? Has the market been driven by just a handful of stocks, or is the performance broader than many people think?
Using closing price data on October 30 (the date is really important here), we can get a year-to-Halloween view on the shape of the market and whether the volatility in the headlines has translated into weakness for investors.
This is especially relevant after another line of argument that I saw in my feed recently. The thesis is that we are in a hidden bear market due to the number of stocks with drawdowns of 20% or more this year. This is a peak-to-trough analysis that is affected by the general levels of volatility in the market and the extent to which rapid information dissemination (for example, via social media) leads to herd mentality in the market.
The focus on drawdowns is one angle, but what if the share price bounces back very quickly? And what about the number of stocks that are down, but not to the extent of 20% from the peaks?
Drawdowns matter significantly for traders on margin and those who don’t have the stomach for large dips, but they are less relevant to long-term equity holders.
I opted to take a different look at the data by screening for American companies that have increased vs decreased in price this year. This is a measure of market breadth, an approach closer in spirit to an equal-weighted index than a market-weighted index.
This means that this market breadth analysis isn’t necessarily an indication of the returns that a market-weighted index may have delivered, especially in an environment of highly concentrated equity indices thanks to the valuations of the tech giants.
Using TIKR to run a few screens, I started by defining a universe of American large caps (market cap of over $10bn) and mid-caps ($2bn—$10bn). This screen returns a list of 776 large caps and 1,014 mid-caps. For those who are used to South African investors talking about an investable universe for local institutions that barely extends beyond the top 100 stocks on the JSE, the sheer size of this list would be a shock. The US market is a big place.
Within the large caps, 491 stocks (63.3% of the universe) are in the green, registering a median return of 20.3%. The losers in that universe have a median return of -15.8%. In the mid-caps, there are 614 green names (60.6% of the universe) with a median return of 24%. The losers’ club has a median return of -14.5%.
It’s clear that more stocks are up year to date than down.
What if we exclude the information technology and communication services sectors to remove the AI winners? This isn’t as impactful as you may think, as there are losers and winners in this new era of tech.
The large-cap universe drops to 621 stocks in total, with 63.3% of them in the green. The mid-cap universe sits at 837 stocks, with 61.2% in the green. The median positive returns are lower than if the sectors are included (17.8% for large caps and 21.3% for mid-caps). The median negative returns are less severe for large caps (-14.2%) and more severe for mid-caps (-16.3%).
Thus far, market breadth is holding up.
If we apply an even more bearish lens by excluding energy stocks in a year where oil has dominated the headlines, we find a large-cap list of 583 stocks and a mid-cap universe of 779 stocks. Within those lists, there are 356 large caps (61.1%) and 465 mid-caps (59.7%) in the green.
A typical market-cap weighted S&P 500 ETF index is up 10.6% year to date, while an equal-weighted S&P 500 ETF is up 14%. If anything, we’ve reached a point where market breadth is propping up the story, while the iconic tech giants detract from it.
Volatility? Yes. A broad-based bear market? Very debatable. The bigger question is whether market breadth will be any kind of defence if things really crack open in tech large caps. When it’s risk-off time, there tend to be many unfair casualties.
