by Liz Ann Sonders, Chief Investment Strategist, Kevin Gordon, Charles Schwab & Company Ltd.
I am Liz Ann Sonders and this is the March Market Snapshot. And as always, thank you for tuning in. So in this month's episode, I want to look under the hood of the stock market’s run since late last year. And as a result, this video will be a little less evergreen than many in the past, but an important topic nonetheless.
[Table for Market is churning like a “duck” for Major indexes and maximum drawdowns is displayed]
Now, for all the cheering, rightly so, about how well the market has done over the past few months, a more detailed story can be found under the surface. Yes, it's a bull market at the index level, but perhaps a better descriptor is that it's a duck market. Now, before you click the off button on this, bear with me, no pun intended. As you can see in this table, both the S&P 500 and NASDAQ are up about 6% year to date, and with no more than a 3% drawdown from a year-to-date high. The Russell 2000 is lagging behind that. Now, toward the right, you can see the performance since the major S&P 500 low back in October of 2022, since which time the S&P is up 42% and the NASDAQ a stellar 53%.
[Column for Average member maximum drawdown from YTD high is displayed]
But here's the full story. Let me get back to the duck reference. Michael Caine once quipped about a duck that it's all calm on the surface, but paddling like the dickens underneath. So the first column I popped in here shows the average member drawdowns from year-to-date highs. And let's hone in on the NASDAQ to see where the full story is most extreme. Yes, the NASDAQ at the index level has not had more than a 3% drawdown from a year-to-date high, but the average member of the NASDAQ, the average member maximum drawdown over that same period is a whopping negative 23%. And the Russell 2000 is not far behind. The S&P's average member drawdown is a lesser minus 9%.
[Column for Average member maximum drawdown from 10/12/2022 is displayed]
Now glancing at the right half of the table, you can see even sharper extremes of churn under the surface. So since the S&P 500's major low, again, that was back in October of 2022, the index itself is up 42%. But the average member drawdown throughout that same period has been negative 26%. Now conversely, in the case of the NASDAQ, those performance numbers are plus 53% and minus 54%, respectively. Now I've written about and spoken extensively about market breadth. And admittedly, it's unfortunate with two wars underway that a battlefront analogy is most illustrative, but it's been used for decades. When there's only a few generals on the front line, even if they're five-star generals, but the soldiers have fallen behind, that's not obviously a strong front. Conversely, even if a general or two falls behind, if more soldiers have moved up, it's a stronger front.
[High/Low Chart for New highs for stocks, but less breadth improvement for S&P 500 is displayed]
So let's dive into a little more detail. Here's a look at the S&P 500's path over the past 15 months, again, back to that October 2022 low, highlighting the new all-time highs reached on several occasions this year.
[High/Low Chart for % of S&P stocks above 200-day moving average is displayed]
On the other hand though, the percentage of stocks within the index trading above their 200-day moving averages, as you can see, has been flat for much of this year. Now, the early part of the rally off of just last October 2023's interim low was accompanied by a sharply rising share of stocks trading above their moving average, but that has clearly faded a bit over the past couple of months.
[High/Low Chart for Finally seeing some breadth improvement…for NYSE net high minus low is displayed]
Now, another breadth measure and often considered a trademark of healthy bull markets is a growing percentage of stocks hitting 52-week highs relative to 52-week lows. Now in this case, we're looking at the very broad New York Stock Exchange. Now as you can see, more securities have been recording new highs than lows, and that's a stark change from 2022 and even most of last year.
[Heavily negative (red box), mostly negative (yellow box) and positive (green box) notations are displayed]
Now, as you can see more clearly here, so many stocks fell to 52-week lows in the bear market year of 2022, and then 2023 didn't offer a lot of improvement.
[High/Low Chart for … but more ground needs to be made up for S&P 500 is displayed]
Now, again, S&P is trading at or near new highs,
[High/Low Chart for NYSE cumulative new high/new low line is displayed]
but the past few months have only made a slight difference in the cumulative new high, new low line. That bottom field is, again, a cumulative look at the prior new highs minus new lows data. And you can see that it has started to turn higher, but you can also see that more work clearly needs to be done here.
[High/Low Chart for Low (but improving) share of stocks outperforming index for % of S&P 500 members outperforming S&P 500 is displayed]
Now, notwithstanding some aforementioned improvement in breadth, it's still the case that a historically low, not record low, but historically low percentage of the overall index of stocks, the S&P 500, have outperformed the index over the past 12 months.
[Table for % of S&P 500 members outperforming S&P 500 is displayed]
Now the good news is this is improving over shorter look back time spans. In fact, it's now 41% of stocks in the S&P 500 have outperformed the index itself over the past one month. So improving, and that's great, but again, more work needs to be done.
[High/Low Chart for “Magnificent 7” a little less magnificent for performance of Magnificent 7 stocks is displayed]
Now let's finish with a look at a crowd favorite topic, and it's the so-called Magnificent 7 group of stocks, and it really comes into play in this breadth story. Particularly this year, the full story of what's going on with these stocks can actually be found under the surface. Now, for background, the moniker of Magnificent 7 was originally based on capitalization with these stocks, these seven stocks representing the seven largest by market cap in both the S&P 500 and NASDAQ.
Interestingly, though, they're no longer the largest seven. Tesla has dropped out of the top seven and has been leapfrogged by Berkshire Hathaway and Eli Lilly and Broadcom closing in as well.
[High/Low Chart for performance of Magnificent 7 stocks since 1/1/2024 is displayed]
Now, all seven stocks were strong performers in 2023. They weren't the seven best, but they were strong performers. But that's not the case so far in 2024, during which time divergence among the group has widened noticeably.
[Table for Magnificent 7 performance for 2023 is displayed]
So here are the details of last year's performance among these stocks. They were, again, they were all strong performers. You only needed to move down to the 63rd ranking to capture all seven stocks in terms of ranked performance within the index for the year.
[Table for Magnificent 7 year-to-date performance is displayed]
But what a difference the turn of the calendar has made. This year's performance so far has a range from negative 27%, just year to date in the case of Tesla, to positive 74% in the case of Nvidia, with now three of the seven stocks ranked in the bottom quintile of the S&P 500's performance. Now we wrote about this, our latest written report titled Beneath the Surface, we dive into more detail on these stocks, including highlighting what are definitely strong fundamentals that have supported the leaders. I won't take the time on this video, but definitely check out that report on Schwab.com.
[List of Takeaways is displayed]
In the meantime, let me sum things up. Again, it's been more of a duck market than a bull market with lots of churn under the surface. Yes, market breadth is making headway, that's good news, but arguably more work needs to be done, including continued expansion of new highs relative to new lows and a growing share of S&P 500 members outperforming the index overall. Now for investors, the real message is around concentration and making sure you are mindful of it in your own portfolios. In fact, the discipline of periodic rebalancing is a great way to keep that concentration risk at bay and to stay in gear with the market. With that, we'll end it for this month. Thanks as always for tuning in.
[Disclosures and Definitions are displayed]
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