While the S&P 500 has hovered around the 4100 level since April, there has been a lot of churn beneath the surface, with the highest fliers rising to truly spectacular levels before crashing back to earth. THREAD/1
To help visualize this, I indexed the various sectors & styles to the Feb 2020 (pre-Covid) high in the S&P 500. This first chart shows the S&P 500 w/ its eleven sectors. The dispersion in sector performance was very wide last fall (mostly due to energy), but it has tightened. /2
Next, the four style boxes (Russell indices). See the recent lopsided performance by large-cap growth, which then passed the baton to value and small caps a few months ago. Whatever dispersion existed last fall has dwindled, while the S&P 500 churns sideways. /3
Now let’s add in some of the momentum plays, including the meme stocks, the secular growers, and high yield debt-levered stocks. (I used the Goldman Sachs thematic baskets for all of these.) Note that the upper scale expands from 5000 to 7000. /4
Next, let’s add the “non-profitable tech” group and recent liquid IPOs (the ultimate momentum plays). We have to expand the upper scale 12000 to fit in their meteoric rise (and subsequent fall). /5
Finally, let’s add bitcoin and the bitcoin-sensitive equities. Now the scale goes to 24000. This makes the S&P 500—which has doubled in 14 months—seem like T-Bills. /6
Such are the extraordinary times in which we live. Combine a war-like fiscal/monetary cocktail with meme culture, a technological revolution and a pandemic, and we get a market cycle that none of us will soon forget. /END
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The narrative is clearly evolving from focusing on the inflation side of the Fed’s mandate to the growth side, and this comes at a time when the seasonals are reaching their weakest point and the mega growers continue to wobble.🧵
The next easing cycle is only a week or so away, and the main question is whether the Fed goes with jumbo (50 bps) cuts or the garden variety 25 bps. /2
No matter how you slice it, the Fed has plenty of room to cut rates here, with all iterations of the Taylor Rule heading south. /3
In absolute terms, the market is in decent shape, with 78% of stocks in uptrends. That’s higher than a few weeks ago, even though the index is lower.🧵
The comparison to the narrow leadership of the late 1990’s is inevitable, but that cycle was much narrower than this one. This gives me some comfort that the current rotation doesn’t have to end in tears the way it did two decades ago. That was a bubble, but this one is not. /2
The two charts below are the same, except two and a half decades apart. Note how that final push to new highs in 2000 happened while 80% of stocks were in downtrends. Now that’s narrow! /3
Put this in the “I thought I’d seen everything” department: the 13 week correlation between the S&P 500 cap-weighted index and the S&P 500 equal-weighted index is now 36%. That’s between two indices that have exactly the same constituents. It’s normally 99%, as one would expect🧵
It’s a good illustration of just how bifurcated the market has become, and what can happen when that inevitable mean reversion finally kicks in. /2
So far, the rotation has been swift and has mostly happened at the expense of the headline indices, with the S&P 500 down 2.3% since the CPI release while the Russell 2000 is up 6.5%. It remains an open question as to whether the market can broaden and go up at the same time. /3
For the markets, it was more of the same last week: the winners won while the rest of the market spun its wheels. 🧵
This continues to be a tale of two markets, with the mega growers breaking away from the pack to such a degree that it becomes nearly impossible for the rest of the market to keep up, let alone outperform. It’s making me rethink the bullish broadening thesis. Perhaps the broadening can only happen in a down market, at least in relative terms. /2
In just the past three months the Mag 7 has rallied 23 percentage points more than the equal-weighted S&P 500 index. Year-to-date, the cap-weighted S&P 500 has gained 13 percentage points more than the equal-weighted index. If you think about the sheer magnitude of that spread, no wonder that so few stocks are outperforming. The bar is set impossibly high. /3
With the debt dynamic worsening around the world, and central banks no longer funding that debt (at least for now), the direction of the term premium for bonds remains a question mark. With the correlation between stocks and bonds now positive, what role do bonds play in a diversified portfolio? 🧵
There are certainly reasons to own them: real yields are now positive and the math of owning bonds is far better now than it was a few years ago. But since 2022 they have not provided the relative balance that the 60/40 paradigm had generally provided since the late 1990’s. /2
If we look at the distribution of risk (annualized volatility) and return, we see that a 60/40 index (60% S&P 500, 40% Bloomberg Agg.) appears to have delivered the goods from 1950 through 2024.. A 9% CAGR against a 9% vol is nothing to complain about. /3
We are now in an era of fiscal dominance, with deficits running at 7% of GDP with no end in sight. The US is now spending more than a trillion dollars on debt service, and projections from the Congressional Budget Office (CBO) give little reason to expect this to improve. The big question is what role the Fed will play in this new regime.🧵
For now, the Fed is on the other side of fiscal policy, keeping monetary policy restrictive while fiscal policy is loose. Debt levels are high, although relative to GDP they are below the 2020 extreme. /2
This divergence between fiscal and monetary policy may be what is keeping the dollar bid these days. The dollar’s strength has persisted despite the USD gradually losing its some of its dominance as the world’s leading reserve currency. /3