Looking Under The Hood: The Average Stock Performing Worse Than The Market

President Trump likes to take credit for the great performance of the stock market since his election. When we look under the hood at what is leading the markets higher, it’s clear that the average stocks is not nearly doing as well as the few stocks that have been leading the markets. Late in the market cycle, this way of looking at the market outlook, known as breadth analysis, can be a helpful leading indicator. By far, the strongest sector has been technology. Today, the technology sector represents over 21.2% of the S&P 500 with the top 5 stocks in the sector more than half of that weight. On Nov 8, 2016 when Trump was elected, technology was 16.8% of the index. The vast majority of stocks in the sector are in the NASDAQ 100 index and even more concentrated in a hand full of stocks that have become known as the FAANG’s+.

The top 5 companies in the NASDAQ 100, MSFT, AMZN, AAPL, FB, GOOGL along with the top to semiconductor stocks INTC and CSCO make up half the index. Our chart shows that SMH (VanEck Vectors Semiconductor ETF) and the QQQ (Invesco NASDAQ 100 ETF) have massively lead the markets higher. If we were to subtract the performance of these groups and look at the S&P 500 index ETF (SPY) and the S&P 500 equal weight index (RSP), you can see the dramatic difference in performance.

Looking further down the size and influence of the largest companies, the smallest 2000 companies in the Russel 2000 index ETF (IWM) has only returned 6.8% annualized compared to the 15.75% to 17.55% returns of the big tech giants and semiconductors. We can see that the average return of an equal weight S&P 500, which smooths out the average return is about half the big influences. And when we look at the value side of the S&P 500, which removes most of the growth tech giants shows more than one full percentage less.

So now we look under the hood and see what the average stock as measured by the Russell 3000 which includes the S&P 500 large caps, S&P 400 mid caps, and the Russell 2000 small caps and how the stocks are trading relative to their own 200 averages. We can see a clear decay in that the average stocks is now below longer term trend lines and the broad based market is far weaker than the headline indexes suggest.

As always, this does not mean you run out and sell everything you own. When we see this and combine it with the message from the inverted yield curve and it suggests that you need a bit more sleep-at-night factor in your portfolios until market valuations improve. Historically, that’s about a 30% correction in the broad US equity markets.


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