Monthly Brief April 2020 – Breadth of Leadership?


From the lows established in the later part of March, global equity markets have now retraced more than half of the decline.  The speed of both the initial decline and that of the subsequent bounce have left investors to debate if gains are merely temporary or the basis for further upside.  The question is not an easy one as two powerful forces collide. 

On one hand, the global economy has experienced a quick, hard stop without much warning and the immediate result has been a demand (or lack thereof) driven slump, with this shock and its many related unknowns causing investors to reduce risk, leading to a sharp market drop.  On the other hand, unprecedented government aid programs have helped to replace lost income for consumers and provided temporary support for businesses during this time of lost demand. This has provided some optimism that the discouraging near-term conditions can give way to a quick economic rebound.

While the sudden stop in many businesses was mandated by policy and occurred quickly, the hoped-for restart will likely take some time before business returns to healthy levels.  And, the apparent early success of both the Federal Reserve and US government’s unprecedented aid programs also leaves one to wonder what the longer-term consequences may be.

The policy support for business and individuals has already helped to cushion the impact of the current economic slowing and that of investor pessimism.  Yet, continuation of the markets’ sharp reversal higher during prior weeks may not account for the inevitable setbacks that will likely prolong the recovery beyond its recent pace.  For investors, a more cautious outlook regarding the continuity and pace of a recovery may be the right path as more details unfold in the coming weeks and months.   

CHART OF INTEREST – Breadth of Leadership?


2020 has taken investors on a rollercoaster ride to say the least.  Following the initial sharp drop, equity markets have worked to bounce back, retracing a significant amount of the decline.  There are many narratives circulating about why and how this bounce occurred and what it may mean.  But, going forward, investors are really wondering “Is this sustainable?”.

Rather than speculating on how this unprecedented environment may play out, we can look to the message of the markets for some context regarding where they may go from here.  One characteristic that historically has been insightful is the concept of breadth, i.e., measures of how much of the market is participating in recent moves.  It stands to reason that broader participation would coincide with broader improvement in economic conditions and optimism of healthier markets.  Likewise, narrow participation might suggest that a few large companies are driving the indexes higher due to less economic sensitivity.  

The accompanying chart from Ned Davis Research visualizes one measure of current breadth conditions by looking at the percentage of the global MSCI ACWI Index made up by the top ten companies.  Currently, this narrow set of companies makes up just over 16% of the index, a condition not seen since the early 2000’s. While these companies tend to be important leaders, broader participation would signal a rising belief in improving global economic conditions, likely a precursor to a more sustainable uptrend in the equity markets.

James Ferrin, CFA
Chief Investment Officer

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