CNN Business/Paul R. LaMonica
There’s a hidden weakness in the stock market
Recent record highs for the S&P 500 and Nasdaq are not indicative of what’s really going on with the broader market, which is this: Most stocks are still having a pretty tough 2020.
Sure, the S&P 500 is up about 3% so far this year. That’s not bad, especially given all the volatility in the market and the severe slump in the economy since March because of coronavirus.
However, the index is is weighted by market value. That means that the strong performances of the five tech giants that dominate the blue chips — Apple (AAPL), Amazon (AMZN), Microsoft (MSFT), Google owner Alphabet (GOOGL) and Facebook (FB) — distort the S&P 500’s overall return.
It’s one reason some half-jokingly refer to the S&P 500 as the “S&P 5.”
But the index tells a different story when you look at the many other stocks in the S&P 500. An Invesco S&P 500 ETF (RSP) that equally weights all of the index members is down more than 6% this year.
Nearly 60% of the companies in the index were in the red for 2020 through Thursday’s close, according to data from Refinitiv.
“Without Big Tech’s influence, the broad market would not look quite as stable as it does today,” analysts from Zacks Investment Research said in a report last week.
The over-reliance on this tech quintet could become a problem if Congress and the president (whether it’s Donald Trump in a second term or Joe Biden) decide to impose tougher regulations on or launch specific antitrust investigations against industry leaders sometime after the election.
“Though Congress is not likely to pass any meaningful legislation this year, there appears to be growing consensus that the current course for Big Tech is not sustainable. From an investment standpoint, the suggestion is that long-term outperformance may not be sustainable, either,” the Zacks analysts wrote.
Investors will look to the Fed to soothe the market next week, but that may be a tall order
Markets are looking to the Federal Reserve to be a soothing force when it meets in the week ahead, but stocks could remain choppy if the central bank disappoints and as investors focus on the election and the economic recovery.
The Fed’s two-day meeting is expected to end Wednesday with minor tweaks to its statement and some clarity on how it plans to use forward guidance. The Fed also updates its economic and interest rate outlook, including forecasts for 2023 for the first time.
But Quincy Krosby, chief investment strategist at Prudential Financial, said the stock market could easily be disappointed because the Fed is unlikely to offer more clarity on monetary policy, such as plans for bond buying.
“The market is concerned the Fed is not going to give us explicit readings on their plans for monetary policy,″ she said. The Fed’s extraordinary policies have been an important factor behind the stock market’s 50% surge from the March 23 low, and it’s also seen as a major factor limiting the depth of the market’s sell-off.
Peter Boockvar, chief investment officer at Bleakley Advisory Group, said the Fed is not likely to tweak much and it continues to buy $80 billion a month in Treasurys. “I don’t think they’ll do anything to the markets either way,” he said.
Stocks were volatile in the past week, falling hard, rallying, falling and rallying again. That left the S&P 500 at 3,340, with a weekly decline of about 2.5%, its worst since June. The harder hit Nasdaq was down about 4.1% for the week, its worst weekly decline since March. The quadruple expiration of options and futures at the end of the coming week could add to the volatility.
Next Year Looks Rocky for the Stock Market No Matter Who Wins the Election
Investors needn’t worry about how economic stimulus, the coronavirus, tech valuations, or the coming presidential election will impact the stock market. History tells them what will happen in 2021. That’s the good news. The bad news? Next year will be rocky.
Things were already looking rocky this past week. The S&P 500 index fell 2.5% to 3341, while the Dow Jones Industrial Average declined 468 points, or 1.7%, to 27,666. The tech-heavy Nasdaq Composite dropped 4.1% to 10,854, extending the previous week’s losses.
They could soon get worse. No matter if Donald Trump or Joe Biden wins in November, next year will be the first year of a new presidential term. And that’s a notoriously tricky time for the stock market.
The presidential investing cycle holds that things are weakest in the first half of any president’s term and strongest in the second half. “In year four politicians do fiscal stimulus to get re-elected,” says Brian Rauscher, head of global portfolio strategy and asset allocation at Fundstrat. Years one and two are about making tough decisions about policy, deficits, and taxes.
The average year-one return of the Dow is about 7%. The average for the S&P 500 is about 6%. In year two, the average return for both indexes dips to roughly 4%. The year-three average return is roughly 12% for both. And year four comes in at a little better than 7% on average.
Along with weak returns, there is another reason to watch out for year one. The Dow and S&P fall about 45% of the time in the first year of a presidential term, the worst of any of the presidential years. The odds of a decline in any other year is about 30%.