Back in Black: S&P 500 Hits All-Time High

Ironically, the absence of a formal recession could be put in the "plusses" column for stocks recently. Per a recent Leuthold Group study, there have been 16 major advances in the S&P 500 since 1957, with the life expectancy of each heavily dependent on whether or not it was preceded by a recession. In the eight cases when the upswing began in the throes of an economic downturn, the index gained an average 135% over 45 months. Conversely, when the preceding S&P 500 decline was not associated with a recession, the subsequent advance was not as powerful at 75% on average over 35 months. The distinction likely rests heavily on the Federal Reserve policy reaction function (easier monetary policy to combat recessions).

In turn, the swift drop in yields—which brought the 10-year yield back below 4% by late December—meant a very broad stock market rally. In fact, during the two-month rally phase, the S&P 500 Equal Weighted Index bested the performance of its cap-weighted S&P 500 brethren. Shown below is the tightening up—since last July's yield trough—of the inverse relationship between moves in the 10-year yield and the equal weighted S&P 500 index.

It's quite a different story for some other members, though. As shown below, in terms of the current maximum drawdown from recent highs, Amazon and Tesla stand out in a not-so-good way. The former is still near bear market territory while the latter is sitting nearly 50% below its all-time high.

Last year, the Mag7 were often lauded as the market's best performers, but that's far from reality. Consider the fact, according to Bloomberg data, that there were 62 members of the S&P 500 that outperformed Apple (the world's largest company by market cap) last year. Perhaps "magnificent" as a descriptor is in the eyes of the beholder; it certainly applies to the size of these companies, but not the performance for every member. In fact, this year so far, you have to go down to the 495th ranking out of the 500 stocks in the S&P in order to capture all seven of the Mag7.

While we don't analyze individual names, it's clear that the Mag7 are often favored by investors because the group exhibits several high-quality factors (a.k.a. characteristics)—such as a strong cash position, high interest coverage, and a healthy balance sheet. It's likely a driving force behind their becoming the pandemic era's "defensive" names. As such, debate has stirred as to whether the Mag7 will suffer if the economy escapes a recession. We don't think a binary tradeoff—where the Mag7 must underperform for the rest of the market to do well—is necessary. Money doesn't have to funnel out of one group into another.

However, there are several flaws associated with the narrative that this buildup in cash will be dwindled and then funneled into the stock market—powering equities even further. As the yellow line below shows, the amount of money market fund assets as a percentage of the S&P 500's market cap is low relative to prior instances during which cash was being built up at a significant rate. When looked at in the context of how much the stock market has grown, the "firepower of" cash hasn't increased at all over the past decade.

Stocks don't need the buildup in investors' cash positions to fall in order to do well. Always and especially in the current environment, we think the economic, monetary policy, and corporate profits trajectories are far more important in determining the health of the market.