June headlines said that the bull market has returned! Hurray! No more worries! Yeah, right.
In my opinion, the idea doesn’t pass the smell test. First of all, I don’t trust the media to tell it straight and I suspect these headlines are products of the Wall Street propaganda machine. Always remember that Wall Street has a vested interest in getting you to invest your money when the timing is good for them, not for you.
True, as of the close of business on June 23, 2023, the S&P 500 Index (a list of 500 stocks, often considered representative of the US stock market) has risen over 20% since the October lows and is up 13.25% year-to-date (Data from Fasttrack). But, when we look under the hood of the stock market, a different picture appears.
The Dow Jones Industrial Average is only up 1.75% YTD.
The Russell 2000 Index of smaller companies is only up 3.43% YTD (Data from Fasttrack).
And, if we look closely at the S&P 500 Index YTD, the top 10 stocks have driven the Index while the bottom 490 stocks are up only an average of 3.95%. In fact, the top 10 stocks in the S&P 500 Index, as a group, are up an average of 69.44% through June 23, 2023. That is a huge difference in the performance of the top performers and the average stock.
If you had been invested in those top 10 stocks you may be a happy investor. However, most investors, particularly those using index funds, are probably wondering why the headlines don’t match your reality.
One reason is that the S&P 500 is a capitalization-weighted index. Capitalization is the amount of money it would take to buy all the shares of a company. This means that larger companies get more weight in the Index calculations – a lot more in some cases.
In an equally-weighted index, each of the 500 stocks in the Index would represent 1/500th, or 0.2% of the Index. However, in the capitalization-weighted S&P 500, the largest company, Apple, represents 7.50% of the Index valuation, 37 times the impact in an equal-weighted Index. That means during this time, Apple has as much impact on the performance as the smallest 243 companies in the S&P 500 combined (Data from Finviz.com). Apple’s 44.1% above-average return YTD, pulls the Index average up significantly due to that Index’s capitalization weighting.
As you now can see, big price moves by its largest components can have an outsized effect on the value of a capitalization-weighted index like the S&P 500 and can give a distorted view of the stock market as a whole.
To provide some perspective, the Invesco Equally Weighted S&P 500 Index fund (Symbol: RSP) is up only 3.45% YTD through June 23rd, 2023, so most stocks are still languishing despite the headlines.
This stock market has all of the hallmarks of a bull-trap rally, one that suckers investors in before another leg down, and it shows almost no indicators of the beginning of a bull market. With only a handful of stocks performing well, a bull-trap looks very likely. This is like the old adage about the generals leading the charge while not noticing that the foot soldiers behind them are dying or deserting, reducing the number of troops they lead. Eventually the generals will realize they have no army left and they will be forced to retreat, too. When the few remaining strong stocks lose their upward momentum, the bear market will be back in force.
So, don’t pay attention to the headlines. This is a dangerous time for investors. I believe that the best plan is to remain flexible so you can pull out of the market when this rally falters, preserving your buying power for the real bull market to come. That is exactly what we provide for our clients at Shadowridge.
If you are not yet a client, call today for a portfolio review to see if our proactive style of investment management can benefit you: 888.434.1427.
