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LIZ ANN SONDERS: Hi, everybody. I’m Liz Ann Sonders. Welcome to the March Market Snapshot. Thanks as always for tuning in. Let’s get right to it.
I want to start just with a big picture look at what has been just an extraordinarily run for the stock market since the March 23rd low of last year. That, of course, followed what was a very short-lived but painful bear market that began on February 19th in the midst of what became the pandemic. And what we’re looking at in this chart is the black line shows the current experience, and it starts at that high point, shows the drop, and then the performance since that point in time. And it’s in comparison with all the other lines, noted with the dates on the right-hand side, other periods where there was at least a 25% decline in the S&P 500 from an all-time high. So this is every experience since the late 1940s that this occurred. And what you can see is we clearly had a lot of depth in the decline, but the run since then has exceeded anything that we have seen in history. It has really been quite extraordinary.
But it hasn’t always looked the same in terms of what the market has done. And I really think you can break this past year or so into several different phases, and that’s what I attempted to do here. So this is just a fairly simple look at the S&P 500, going back to the beginning of 2020. And you can see I’ve color coded the line. You can clearly see the bear phase, that 34% drop in the S&P, as discussed, from February 19th until March 23rd.
And then we had what I would call a concentrated recovery, and we really had two of them. They were broken up in June with that little yellow line, a consolidation phase. And you can see we’ve had three consolidation phases, as I’m calling them. But what I mean by concentrated recovery is that that was an era, both of those periods, where performance was really, really narrowly driven by a very, very small subset of stocks, the FAANG-type stocks, the Big Five, which I’ll get to in a minute, but it really was not broad leadership. It was very concentrated leadership in what we now think of as the pandemic, or COVID winners, again, broken up by a couple of consolidation phases.
Then we had a broader recovery. You can see that in the blue section. That started at the beginning of November, and it came in conjunction with what was initially the positive news out of Pfizer on vaccines. Of course, that rolled into a series of good news reports on the vaccine. It represented the light at the end of the tunnel in terms of not a date certain point where we would be post-vaccine, post-pandemic, but a sense that it wasn’t too far down the road. And that’s really when we saw a broadening out in terms of market performance, and investors started looking at parts of the market, like energy, like financials, like industrials that really hadn’t participated during those two prior very concentrated recovery phases noted in green.
And then, of course, we’ve been in a bit of a consolidation phase more recently, too, with the major averages having some sort of weakness, some volatility, some rotational changes since about February 12th. And, you know, so far they’ve been fairly short-lived, and I think at this stage it looked like this one may be short-lived, as well. But it’s just a picture to try to explain the various chapters in this stock market recovery so far.
Now, I mentioned the Big Five. For those who aren’t aware, these are the five largest stocks in the S&P 500, and they are by name, Apple, Microsoft, Amazon, Google, and Facebook. And they have really dominated performance, although that’s been coming off the boil a bit. So you can see going back to January 2020, up until that peak you see. That occurred on September 2nd. What this is looking at is the performance spread between the performance of the big five versus the entire rest of the S&P 500, call it the other 495. So year-to-date 2020 through September 2nd, you see that peaked out at about 62%.
Let me put the numbers behind that spread. Year-to-date 2020 through September 2nd of last year, the Big Five, on average, were up 65%. The other 495 stocks were up only 3%. That was, by far, a record spread. Now, the reason why the S&P was hitting an all-time high then is because even though those are only five stocks out of 500, it’s a capitalization-weighted index. So at that point, that same day, you also peaked-out in terms of the percent that they represented of the S&P 500, which was 25%. So their strength alone could power the index to all time highs, even though there was still a tremendous amount of carnage under the surface.
And then you see we went through a bit of a rollover in the September consolidation phase, a bit of flattening out, and then a recent rollover again, in conjunction with what I touched on, which is just a broadening out, where leadership has been broader, it’s been in more traditionally cyclical parts of the market. And you get fits and starts, where these stocks become market darlings, at least in the short-term again, but, clearly, you can see that significant shift that began to occur in the beginning of September.
There’s other ways we can look at these phases and where strength has been, and maybe where there’s some convergence happening now. So Goldman Sachs has created a number of really interesting indexes, two of them are shown here. And this is their title of the indexes, but I think very aptly titled, it’s their stay-at-home-themed index and then the reopening-themed index. And there’s lots of stocks in each of them and it’s pretty easy to look up what’s in there. But the blue stay-at-home stocks really saw significant strength, especially in the kind of June to November timeframe. You see that blue line well ahead of the yellow line. But more recently, particularly this year, now that we really have a sense of the point where we’re going to be post-vaccine, post-pandemic, whatever that looks like, and you’ve seen a real shift in performance, where, finally, that reopening theme has taken on more of a performance leadership theme, hopefully leaving the concept of the pandemic and staying at home behind us. Maybe still we’ll see some choppiness in the near-term in terms of the behavior of these indexes, but another example of one of these shifts.
Another area where we’ve seen a tremendous amount of interest, and here’s where I get into where I think there’s a little bit more to worry about within the market, I think it’s very heartening that we’ve seen a broadening out in leadership, that there is more interest in the reopening kind of stocks, but also this year, we’ve seen a heightened amount of speculative fervor, momentum-driven speculation, occurring in more arcane subsets of the market, really where there’s limited fundamental support and it’s mostly about sort of speculative, momentum-driven herd following. It’s tied into what I’ve been calling the Reddit-fueled flash mobs. This is a broad index of most shorted stocks, of which GameStop was in January and seems again to be the poster child for some of the speculative excess. But even here we’ve seen, not just because of GameStop and some of the volatility there, but more broadly an index of these stocks is actually down well into correction territory. So these momentum-fueled rallies in not fundamentally-driven parts of the market inevitably go through a corrective phase. And our warning is just be really careful and understand the difference between get rich quick, not fundamentally-based, speculative schemes versus long-term disciplined investment.
But this isn’t the only pocket of the market where we are seeing speculative excess, some of which is coming off the boil. Another Goldman Sachs index, non-profitable technology companies, a lot of these sort of future theme, momentum-driven stocks that really don’t have any fundamental support at present because of the lack of profits. And you can see the huge run, particularly since lows of March of 2020, and now, actually, in what we would call official bear market territory, which is generally defined as a drop of at least a 20%. So, again, one of these hot areas of speculation. Inevitably some of that comes off the boil.
You’re also seeing it in the world of IPOs. This is a Renaissance IPO Index, an index of companies that have come public. And you can tie this into the SPAC craze, as well, the special purpose acquisition companies, which it’s a different way for companies to come public. Maybe I’ll do another market snapshot just on that, but similar idea. The point is that where we saw a lot of speculative frenzy and hype and momentum-chasing, again, come off the boil and we’re now in bear market territory. Another… just a reminder about melt-ups, especially in areas where you don’t have that fundamental support, in many cases, can sometimes be followed by a pretty significant give-back.
Now, throughout all of this, I talked about these rotations, and what has been in favor, what’s been out of favor. So now I want to step back, to some degree, where I started, and move away from just where these pockets of speculation have been, but highlight now the nature of this rapidly changing market landscape in terms of leadership, laggards, and how rapidly we’re seeing shifts here.
So the concept of this, I typically call an investing quilt. Normally, what is ranked are broader asset classes and the columns, typically, refer to years, but this is a different take. What I did instead was took the 11 sectors of the S&P 500 and the S&P 500 Index, itself, and instead of the columns representing years, they represent months, with the sector at the top having been the best performer of that month, all the way down to the worst performer that month. And what you should see based on just a quick glance at this, given that each sector has a color, is that there’s truly no pattern here. And you can see major, major moves, especially in some of the higher beta or higher volatility sectors. And a couple of things I wanted to point out here.
So the far right column is just the full one year, past year performance covering all of these 12 months. And you can see tech is at the top in the past year. And energy is not at the bottom, but look at energy, you know, barely a positive return. But then look at that top row. The technology sector was only the leading sector three times, yet it’s at the top of the leaderboard. The energy sector was the leader four times, yet it barely has a positive return. In fact, I recently created some data around whether this spread, this wide spread on a month to month basis between the biggest winner and the biggest loser, is high historically. And it absolutely is. It’s not a peak, but we similar high levels back in the late 1990s. Just another thing to be mindful of.
The way to navigate this for investors is… I already talked about, make sure you understand the difference between speculating and investing, but instead of saying, ‘Okay, I guess the key to success in investing is figuring out what’s going to be at the top in March, what’s going to be at the bottom,’ and position that way. If anything, you want to maybe rebalance a bit more frequently, take advantage of these moves by reacting to them. And what I mean by that is when you’re given a big out-sized month in terms of strength or six weeks or two months, whatever it is, pare back a little bit, add to areas that have underperformed, and stay in gear that way. I think it’s a much more disciplined and better way than trying to clear our crystal ball to figure out what is going to be the leader next month or the month after that.
What this all comes down to is that these pockets of speculation, these extreme rotations that we’re seeing, does bring back a lot of memories, as I already touched on, of the late 1990s. And I think we have to be mindful of that, because investor sentiment tends to be a very important driver, especially when sentiment gets to an extreme, and, sadly, it tends to be a contrarian indicator. So when you have extremes of optimism or euphoria, those tend to mark market peaks and vice versa. You don’t automatically see the market move in the opposite direction the minute you get to some peak level of optimism, but it does establish a bit of a risk, especially if there is a catalyst.
Now, there’s lots of ways to measure investor sentiment. We can look at speculative excess and pockets of the market like we touched on throughout this presentation, but we can also look at measures more broadly. This is an interesting sentiment indicator. It was actually… the concept was created by Citi. Actually, my friend Tobias Lefkowitz, their strategists or counterpart at Citi, but it’s a proprietary model. And our friends at SentimenTrader managed to cobble together what is probably a pretty close proximity, and I can track this on a daily basis. And what you could see, somewhat troublesome recently, was that we went to a peep of euphoria unlike anything we’ve ever seen, including back in the 2000 era at the peak of the market, but I think because of the choppiness in the market recently, we’ve seen that come off the boil. And you could see the table below, which goes back to 1988 and looks at just three zones of that panic-euphoria model. And we were, until recently, in that highest zone of euphoria, which is actually the zone in which, historically, the market has had negative annualized returns, not dire returns, but negative annualized returns. We’ve now come off the boil there, too.
So if there’s anything beneficial about some of this choppiness, the weakness that we’ve seen, the 10% correction we got in the NASDAQ, is these days it more quickly brings a sentiment, again, off the boil, and that, I think, is a healthier environment than one that is marked by massive speculation and massive euphoria. So I’m comforted by this, but the sentiment environment, as always, in particular, in today’s kind of market environment, I think, is a key to keep a close eye on.
Thanks for listening, as always. And tune in again next month.