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It's Not a Bull Market - It's a 'Duck' Market. Here’s Why.

March 8, 2024
minute read

U.S. stock indexes, exemplified by the S&P 500, have been on an apparent upward trajectory recently. However, a detailed analysis by strategists at Charles Schwab & Co. underscores a significant disconnection between the stable performance of major equity indexes and the more turbulent movements observed among their individual constituent stocks. This disparity sheds light on the distinctiveness of the current bull market compared to historical trends, prompting some to approach the market's ascent with caution.

The research reveals that while the S&P 500 has remained relatively unchanged from its record highs in 2024, the average stock within the index has exhibited considerably higher volatility. Year-to-date, the S&P 500 experienced a maximum drawdown of 2%, a stark contrast to the 9% drawdown observed for the average index constituent. Kevin Gordon, senior investment strategist at Schwab, emphasizes the unusual nature of this broad dispersion in volatility levels, describing it as atypical for a bull market. Liz Ann Sonders, Gordon's colleague, aptly characterizes the market as acting more like a duck – calm on the surface but exhibiting significant activity beneath.

This discrepancy is even more pronounced in the case of the Nasdaq Composite, a tech-heavy index. Despite experiencing only a 3% maximum drawdown in 2024, the average Nasdaq stock saw a 23% decline from peak to trough. This pattern persists when considering performance since the inception of the bull market on October 12, 2022, with the S&P 500 rising 43% compared to a 26% pullback for the average index stock.

The widening gap between index-level volatility and individual stock volatility reflects a market imbalance, where a handful of stocks mask the relatively lackluster performance of many index constituents. Approximately half of the S&P 500 stocks are trading below their January 2022 levels, and only around 10% have outperformed the index over the past year – a historically low percentage at this stage in a bull market.

The significant outperformance of a few of the largest U.S.-traded stocks, known as the Magnificent Seven, has compensated for weakness in other areas of the market. These megacap stocks, including Nvidia, Microsoft, Apple, Amazon, Meta Platforms, Alphabet, and Tesla, were responsible for the majority of the S&P 500's 24% advance in 2023. Although some members have lagged in 2024, gains by Nvidia and Meta Platforms have offset the overall performance.

Market breadth, indicating the number of individual shares participating in the rally, has shown improvement, but not without fluctuations. While the share of stocks trading above their long-term average has increased since the beginning of the year, it remains below its cycle highs from December. The strategists at Schwab view this as a proxy for market participation, emphasizing its historical reliability as a leading indicator of potential challenges ahead.

Despite the recent positive developments in market breadth, the ongoing question for investors revolves around whether this trend can be sustained. The equal-weight version of the S&P 500 recently surpassed its previous record high from January 2022, signaling an encouraging sign of improving breadth. However, the future trajectory remains uncertain, and investors are keenly watching for further indications of sustained market participation for the rally to continue.

Editorial Board
Eric Ng
John Liu
Editorial Board
Bryan Curtis
Adan Harris
Managing Editor
Cathy Hills
Associate Editor

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