Monthly Brief September 2019 – US Equity Market Breadth
September closed out the third quarter with many parts of the global capital markets reversing course from trends established in prior months. While the quarter’s leadership was marked by assets often considered to be somewhat conservative, such as US Treasury bonds and gold, the global equity markets stepped up in September to lead the way. Broad US and emerging markets indices moved higher but were both outpaced by developed international markets.
The leadership exhibited by the global equity markets during September could suggest improved optimism by investors, yet a closer look leaves one somewhat cautious towards the near-term future. While the broad developed international equity markets were strong, they had lagged the US for quite some time. In particular, the MSCI EMU Index (which tracks the largest companies from the Eurozone) had underperformed the MSCI USA Index by approximately 20% over the past 18 months. Was September a sign of improvement, or bargain-hunting? Interest rates on mid and long-dated US Treasuries also closed higher in September, often interpreted as a sign of anticipated economic growth improvement. But they peaked mid-month, before rolling over through month-end.
The push-and-pull of what’s next for the global markets continues and the issues remain generally the same, led by global trade concerns, Brexit, Hong Kong protests and economic growth concerns in the Eurozone. And adding talk of impeachment proceedings to the list certainly doesn’t clear things up.
While these issues are front-and-center for determining what’s next for the market, history suggests there is often an anecdotal event remembered as indicative (but not the catalyst) of a changing market “era”. During the month, WeWork, a commercial real estate company that provides shared workspaces to other companies, attempted to raise capital through an initial public offering (IPO) targeted at $3 billion. Over the past few years, several companies (often technology-based) have successfully raised capital through IPOs, despite their businesses having not yet reached profitability. But, for WeWork, investors suddenly drew the line and the lack of interest at the asking price caused the IPO to fail. While WeWork will continue to try to build their business, the sudden reversal in investor interest may be indicative of a changing landscape. Is this event alone a signal of tougher times ahead for equity markets? No, but it is a curious time for investors to draw the line…
CHART OF INTEREST – US Equity Market Breadth
As a common gauge of the US equity market, the S&P 500 Index is watched closely by nearly all investors. Whether the index moves up or down, investors begin to draw conclusions about the markets, generally relating gains as a positive sign and declines as a note of caution.
But assessing the health of the economy and markets through the movements of a stock market index can be problematic for several reasons. One reason is that many indexes, including the S&P 500 Index, emphasize larger companies over smaller ones, resulting in the potential for a few stocks to determine the index’s moves. For example, while there are approximately 500 companies represented in the S&P 500 Index, three companies alone (Microsoft, Apple and Amazon) combine to make up more than 10% of the index. It follows then that the message of this index is heavily influenced by how the largest companies are performing. Yet, healthy market environments typically require broad participation as evidence of further sustainable advances.
To better understand the market’s message, it’s helpful to assess how many members of an index are participating in the current trend. One common measure in this regard is to assess how many stocks are moving higher consistently enough to be above their average price over the prior 50 days. If a high number of the stocks in the index are above their respective 50-day moving average (50-dma), it’s reasonable to conclude that the broader trend is moving higher. This month’s chart compares the S&P 500 Index with the percentage of its member stocks that are above their respective 50-dma.
Following the low in December 2018, the subsequent market bounce was accompanied by broad participation peaking in late February (red circle on lower chart) with over 90% of the stocks in the index above their 50-dma. Since that time, a divergence has developed as the market peak in mid-July (red circle on upper chart) was accompanied by fewer stocks trading above their 50-dma. And while the general trend in the market has been modestly upwards, the number of stocks above their 50-dmas has continued to deteriorate.
While no single datapoint tells the whole picture, this dynamic suggests a degree of caution is appropriate concerning the equity markets’ next move.
James Ferrin, CFA
Chief Investment Officer
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