mYCharts - December 7, 2021
Bear Market Mania with Charlie Bilello
Is this a bull or a bear market? In looking at any of the major U.S. indices, that might seem like a ridiculous question.
The S&P 500 is up over 20% on the year and has hit 66 all-time highs, the second most of any year in history (only 1995 has had more).
And the S&P 500 has achieved these gains with remarkable calm: a maximum drawdown of only 5.2%.
So case closed, then, it’s a bull market? Not so fast.
If we dig a bit deeper, we find something very interesting.
While the S&P 500 is only 0.27% below its all-time high, the average Russell 3000 stock is 38% below its all-time high. Incredibly, 64% of Russell 3000 stocks are 20% or more below their all-time highs.
How can that possibly be true with the major indices having one of their best years ever and only a few percentage points away from their all-time highs?
Many indices like the S&P 500 are weighted by market capitalization, meaning a small number of the largest stocks can have an oversized impact on the overall index, masking weakness underneath. And the influence of the largest stocks in the S&P 500 has only been growing in recent years. The top five holdings in the S&P 500 (Apple, Microsoft, Alphabet, Amazon, and Tesla) now represent over 23% of the index, which is the highest concentration we’ve ever seen (note: data goes back to 1980).
If we broaden this to look at the top 20 names in the S&P 500, they now comprise 39% of the overall index. Of these 20 names, 12 have hit all-time highs in the last month and most (15 out of 20) are up over 10% on the year.
Thus far we’ve limited our discussion to U.S. stocks, which are outperforming most other countries in 2021.
If we look at equities in China, the world’s second largest economy, we see a very different picture. The MSCI China index ($MCHI ETF) is more than 30% below its high from earlier in the year while Chinese Internet stocks ($KWEB ETF) are down over 60%.
So, is this a bull or a bear market? As we have seen, that depends entirely on the portfolio of the beholder. If you’re solely a U.S. market-capitalization index investor, it’s still a raging bull market.
But if you’re invested in any number of other securities (ex: high growth stocks ($ARKK ETF), recent IPOs ($IPO ETF), recent SPACs ($SPAK ETF), or Chinese equities ($MCHI or $KWEB ETFs), it’s most definitely a bear.
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