At two meetings I was in yesterday the topic of the current “narrow rally” was brought up. “Narrow rally” means just a few mega cap stocks going up a lot while the rest of the market does little. The big move in NVDA equity (+26% in a single day) on Thursday might have brought out the question, but if it’s on the minds of a few, it’s likely on the minds of many. Here’s some thought on “narrow rally” as you enjoy your Friday morning coffee.
Up until Silicon Valley Bank (SVB) self-imploded in mid-March, the themes for 2023 were as follows: value > growth, international > US, lower multiple stocks > higher octane stocks. Then SVB blew up and rates cratered. The 2y UST was 5.25% the day before SVB went kaboom, and traded at 3.75% just ten days later. A record fall in short rates. As rates fell, the market rushed to buy back growth stocks that struggled all thru 2022. Formerly FAANG (now MAANG) plus anything the rhymes with “AI” (i.e. NVDA) went off to the races. Roughly ten stocks in the SP500 have been the source of all the return this year for that index. Thru yesterday, the SP500 was up +8.1 while the SP500 EQUAL WEIGHT stock index (basically the other 490 stocks in the SP500) has returned -1.2%. It’s a wide gap for sure – you have to go back to the late 1990s to see similar market concentration. The chart below captures the history of this phenomenon: lines above zero signal SP500 >SP500 equal weight while line below signal victory for equal weighted stocks.
I guess a couple of takeaways: (1) both of these phenomenon can and do happen so you need to be diversified across both size and sector when thinking about asset allocation. We practice and preach that every day. (2) some might point to this sort of rally and consider overall market technicals poor – “a lack of leadership” argument. We disagree. While ten stocks might be driving the SP500 return, those ten stocks represent about 36% of the market cap of the index…and that’s a lot of leadership. That group has some great looking charts and that’s a good thing. And lastly, (3) history says the opportunity going forward likely comes from the rest of the market, the group that has generated little return so far this year. Reversion to the mean does occur.
We’re about to enter a recession so own quality, be diversified, and stay away from things like HY bonds where permanent loss/impairment will occur. Asset allocation and time perspective matter most.
Happy Memorial Day to all. “Decoration Day” was celebrated from 1868 until 1970 to honor those who made the ultimate sacrifice. In 1971, it was renamed Memorial Day. Why we celebrate remains the same. They don’t call it the land of the free and the home of the brave for nothing. Have a nice/safe weekend everyone.
Source: Bloomberg Finance LP, Deutsche Bank as of May 25, 2023
Richard Barrett
Chief Investment Officer
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