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Bear Market Mania with Charlie Bilello

FEATURING THE FOUNDER & CEO OF COMPOUND CAPITAL ADVISORS, CHARLIE BILELLO, @charliebilello

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).

S&P 500 Level since January 2021

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S&P 500 All Time Highs from 1929 to 2021

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And the S&P 500 has achieved these gains with remarkable calm: a maximum drawdown of only 5.2%.

S&P 500 Level $ Off High since January 2021

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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).

S&P 500: Weighting of Top 5 Holdings from 1980 to 2021

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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.

Top 20 Holdings in S&P as of 12/3/2021

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Thus far we’ve limited our discussion to U.S. stocks, which are outperforming most other countries in 2021.

Country ETFs: 2021 Total Returns in US $

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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%.

MSCI China index ($MCHI ETF) compared to Chinese Internet stocks ($KWEB ETF) since January 2021

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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.

Securities Outside of the U.S. Market-Capitalization Index since January 2021

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Charlie Bilello, Founder and CEO of Compound Capital Advisors

Charlie Bilello – Founder and CEO of Compound Capital Advisors

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