This market is doing all it can to demonstrate the old maxim that familiarity breeds contempt. The S & P 500 , as all are painfully aware, has been confined to a tight and anxious range, leaving it at the exact level of three, six, 12 and even 24 months ago. The way the benchmark has managed to stay here since March has elicited a constant stream of contemptuous critique for being overly dependent on a smallish handful of giant growth stocks while the majority of the tape languishes. Even the big-picture headwinds are familiar echoes of past traumatic episodes: the narrow mega-cap leadership prompting warnings about the Nifty Fifty and tech bubble, the Federal debt-ceiling standoff evocative of the 2011 market mini-panic and the persistent bank-stress story summoning the 2008 financial-crisis nightmare. And yet earnings have been better than most were braced for, the economy is slowing but not buckling, and the big-cap indexes have so far held well above the October lows. Clearly the market is captive of strong, opposing and somewhat unpredictable currents, as the passengers argue over what might get stocks unstuck, and in which direction. The Breathless Breadth Debate I dove deep into the stark bifurcation of the market here two weeks ago , and the huffing and scoffing at the clustering of strength among the elite few Nasdaq stocks has only grown more urgent since. Wall Street is busy citing it as not only extreme but dangerous, with one firm on Friday insisting that without 20 stocks riding the AI wave, the S & P 500 would be down 2% this year instead of up more than 7%. Leaving aside the somewhat arbitrary nature of assigning what proportion of a net change is owed to certain stocks, one can play this game many ways. Excluding financial stocks, for instance, the S & P 500 would be up 11% for the year. It’s also not clear what the precise complaint is. Yes, broader rallies in general are stronger, more durable ones. Cyclical sectors are ragged, with semiconductors, retail, materials and heavy-equipment makers giving up early-year strength. Consumer services and homebuilders are holding in well so far. The equal-weighted S & P 500 is flat for the year and up 13% from the October low, an unimpressive showing that is either an uncommonly weak bull trend or a bear market on an atypically long pause. But the mega-cap tech dominance this year is also merely a catch-up move by the most wounded part of the market in the 2022 downturn. Here is the equal-weighted S & P 500 vs. the Nasdaq 100 since the end of 2021. Not exactly a picture of profound, long-running imbalance, more like the ebb and flow of market-cap preferences. The likes of Microsoft , Nvidia , Meta Platforms and Alphabet have also had 2023 earnings forecasts revised up in recent months, in contrast to most of the market, restoring some of the predictable-growth advantage they lost last year. No doubt, the AI theme is feeding a capex, excitement and hype cycle that is at risk of overshooting if it hasn’t already. And Apple, with a market cap exceeding the entire Russell 2000, is right up at multiyear price and valuation resistance. Still, if the concern is that investors will look at the S & P 500 juiced by mega-tech and infer that the market is in great shape and the economy must be beyond reproach, such worry is badly misplaced. Investors are not speaking, feeling or acting as if the S & P 500 this year is compounding at a 24% annualized rate, which it is. They are uneasy and expecting trouble. Goldman Sachs head of hedge-fund coverage Tony Pasquariello on Friday said, “The trading community remains very defensive in their risk taking,” based on futures positioning and long-short exposures, adding that in a Goldman client survey “bearish sentiment is close to what we saw last summer, which was the most bearish on record.” Set against this tactical dynamic, retail investors remain well-exposed to stocks, though according to a weekly Bank of America private-client tally, equity allocations continue to slide and are now at their lowest aggregate level since September 2020. This along with cyclicals languishing at far lower valuations and investors having marinated in recession anticipation for a year suggests, if nothing else, that high expectations are not among this market’s big problems. Breaching the banks The bank-stress story has gone from acute emergency to chronic malaise. Deposit flight has abated, mostly, but the stocks are bereft, would-be buyers mistrustful of stated book values, mindful of impaired earnings power and bracing for more regulation and credit stress. The three-month drop in the KBW Bank Index has reached 36%. Only twice in 30 years has it had it worse performance over such a span, in the Global Financial Crisis when the system nearly failed and in the flash Covid crash in 2020. The group might be getting toward “close your eyes and buy” levels, but absolute valuations aren’t broadly scraping bottom and sectors under this kind of liquidation with the market seemingly keen for a policy fix can overshoot along the way. Yet it must be worth something that this is all happening due to funding costs rising because consumers have good high-yielding options, not because of toxic credit conditions. In fact, the reason banks sit on unrealized losses on their loan portfolios is that something like 80% of homeowners with a mortgage are locked in below 5%. Apple last week just paid 4.85% for new 30-year debt, so it’s not bad for the typical household to be paying less than a double-A-plus-rated $2.7 trillion market-cap company. Does this go to ’11? With the posturing over the debt-ceiling and proposed spending cuts colliding with a twitchy stock market on alert for an economic downturn, the shadow of 2011 is tough to escape. The stock market has, coincidentally or not, carved a similar path so far this year as it did to begin 2011. The S & P 500 that year raced higher to print a 7% gain into a February high, then chopped sideways. On May 12, 2011, the index was up 7.4% on the year; at the close this Friday, May 12, the S & P was up 7.2%. In 2011, it would keep chopping in that range for another two months before plunging in conjunction with Standard & Poor’s downgrading Treasury debt even after a debt-ceiling compromise had been reached. Much else was happening, from European sovereign debt melting down to fears of a recession relapse in the U.S. Yes, that’s right, while 2011 in hindsight seems part of a steady, slow recovery after 2009, at the time it was seen as at risk of another contraction. Headlines included “On the Verge of a Double-Dip Recession” (New York Times), “Ten Signs the Double-Dip Recession Has Begun” (NBC News) and “Forecast Says Double-Dip recession Is Imminent” (CNN). It wasn’t. Yet fear of fiscal austerity colliding with cyclical weakness clearly drove a quick and queasy flush in stock prices. In fact, the lack of a more decisive, cleansing flush in stocks last year is among the reasons so many observers are reluctant to believe the tape’s state of suspended animation is a base for an eventual larger advance. I’ve noted repeatedly that if last year’s gut check – a 27% peak-to-trough S & P 500 loss taking it down toward merely average valuations – were all the pain investors had to endure, then they’d have gotten off relatively easy. The tradeoff for this is, forward returns from that low didn’t look terribly compelling, Which is, perhaps, why the recovery so far has been wan, and why so many investment pros seem to want another chance to buy the S & P 500 at 3600 or lower, to refresh those expected-return models. Sometimes the market bows to the desires of the crowd. But not always, and certainly not on command.
