Author: David I. Templeton, CFA, Principal and Portfolio Manager
From time to time I note the economy is not the market and vice versa. Being aware of this difference has proven important this year as the S&P 500 Index is up 12.37% through Friday's (6/2/2023) market close. Much of the recent economic commentary has centered on predicting when the U.S. economy is going into recession, some stating by year end. Undoubtedly the Fed's aggressive interest rate hikes over the last year or so is expected to have a slowing impact on economic activity and it is. The negative news flow has weighed on investors and their investment actions seem to confirm this. In spite of strong returns for the market, investors have been net sellers of stocks based on mutual fund and ETF flows as seen below.
In spite of the mixed economic news, the equity market continues to move higher. Unique to the market this year is the narrowness of the advance, both in the number of stocks participating in the move higher as well as a limited number of asset classes participating. As the below chart shows, the average return of just six stocks, Meta Platforms (META), Amazon (AMZN), Apple (AAPL), Microsoft (MSFT), Nvidia (NVDA) and Alphabet (GOOGL), is a positive 77.5%. The S&P 500 Index is represented by the maroon line and the green line represents the Invesco S&P 500 Equal Weight ETF (RSP.) In this index each stock is weighted the same and the return of each stock contributes equally to the calculation of the ETF's return. Essentially, the 2.3% return represents the average return of stocks in the S&P 500 Index. The purple line represents S&P's Dividend Aristocrats (NOBL) which consists of companies that have increased their dividend every year for at least the last 25 years. Companies that can achieve this record are generally higher quality ones. The year-to-date total return for the Dividend Aristocrats is 1.2%.
In looking at the return of the cap weighted S&P 500 Index compared to its equal weighted counterpart, mostly the two indexes move in the same direction as seen in the second panel in the below chart. The top panel is the year-to-date return and since the end of March, the equal weighted index has actually declined.
Historically, when return gaps like this develop, the equal weighted index return is more likely to catch up to the cap weighted index return as a broader number of stocks begin participating in the advance. In fact, last week's market return may be the beginning of the lagging stocks and asset classes beginning their catch-up move. As the below table shows, some of the factors and asset classes that are lagging this year, were the best performers last week. Small company stocks were up 3.33% on the week yet only up 4.39% this year. The Dividend Aristocrats were up 2.20% and outpaced the S&P 500 Index. The Aristocrats' weekly return was all generated on Friday when these dividend stocks were up 2.62%.
In summary, investor bullish sentiment is mixed but bullish sentiment as measured by the American Association of Individual Investors remains low. Investor actions do not seem overly bullish except for possibly interest in the artificial intelligence stocks. The narrowness of the market this year may be another contrarian market sign as well with the lagging stocks now beginning to join in the market advance.
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