Macro Minute: Week of June 26, 2023
I have a couple of cool charts to talk about today.
The first chart I want to go over tells the story of what has driving stock market returns this year.
We have a scenario of seven companies driving all of the performance in the most widely used index for the US stock market. This does beg the question of how seven companies can do this. To answer that we have to look at how the index is constructed. The S&P 500, and most other index’s, is a cap-weighted index. This means that the larger the company gets relative to other companies it will have a larger allocation in the index. As of the time of this writing, these seven stocks make up over 27% of the index! Anyone investing in something other than those seven will have very different returns this year and anyone just buying the index need to be aware that you are increasingly taking the returns of these seven stocks.
The second chart today is from Jurrien Timmer, Director of Global Macro at Fidelity.
In this chart, Jurrien has overlaid the S&P 500 in previous bear market rallies and compared them to today. He is showing that it is becoming increasingly difficult to point to previous rallies within larger bear market drawdowns to today. History shows that most rallies within a bear market rarely are able to rise above 50% of the drawdown and they are typically short lived. Neither of these are currently true. He does go on to say, “As I have been writing in recent weeks, if the Fed is closing in on the end of the rate-hiking cycle, and if earnings are almost done with their relatively modest decline, it’s historically plausible that the market may have bottomed and that a new cyclical bull market is underway. But those are big ifs.” Time will tell if we have entered a new bull market or not, but a diversified portfolio will be able to handle whatever comes.
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