Best: “The S&P 500 index has disconnected from most of the stocks in it; reminds me of the dot.com”

The S&P 500 index, which includes the 500 largest companies traded in the US, has risen by about 14% since the beginning of the year and is trading at record levels. However, a more focused look at the composition of the index shows that the picture is less positive: most stocks have fallen, and only 2% of them are currently trading at record highs Looking at other indices also reflects the complexity. “What is the real story of the American stock market?”, Alex Zbzinski, chief economist at Meitav Investments, tries to answer.

According to Zabrzynski, “On the face of it, the story the markets are telling looks like this – the stock market continues to rise because the American economy is strong and inflation is falling, which will allow the Fed (the US Federal Reserve Bank) to gradually lower interest rates.” In accordance with the same scenario, bond yields also decrease.”

However, he adds that unlike the performance of the S&P 500 index and the Nasdaq index, which continued to rise at sharp rates, the smaller stock indices, such as the Russell 2000, S&P 400 Midcap and S&P 600 Small Cap, recorded declines of 4%-5% in the last month.

“Even in the main indices, the picture is a little less good than what the change in the index itself describes,” adds Zabrzynski. Besides the fact that only 2% of the S&P 500 shares are trading at a record high, he notes that in the last month no less than 66% of the shares in the index fell. Only three out of ten sectors in the index achieved a positive return, and only one of them – the IT sector – beat the index. Since the beginning of June, nine out of ten sectors in the index have recorded a lower return than the index itself, a record of at least five years.

In the bottom line, according to him, despite the increases in the main indexes, the American stock market reflects investors’ fear of a weakening of the economy.

Three shares, and all the rest

In a conversation with Globes, Zabrzynski says that “what is happening today in the American stock market is quite unusual. We see that most stocks are falling while the index is rising, and most sectors are performing worse than the index. Mathematically, it should have been plus or minus half and half, and about nine out of ten Sectors go down – this is an exception. The reason for this is that there are very few companies that pull the general index up, when most stocks behave differently.”

The rising stocks are of course the technology giants Nvidia, and with it Apple and Google. “It’s not just a technical matter,” he points out. “If it weren’t for these stocks, the discourse in the media regarding the stock market, and as a result of it the state of the economy in the US, would probably be completely different.” According to him, the state of most stocks reflects a weakening of the economy, as reflected in the economic data of the last two months.

“The current relationship pattern between the major stock indexes and the economy is a bit reminiscent of the dot.com period (the Internet stock bubble), when between October 1999 and March 2000 the Nasdaq rose by almost 90%, but the S&P 500 index of equal weight remained unchanged,” says Zavez Yansky. He emphasizes that the comparison with dot.com is not intended to conclude that there is a bubble that will burst, but that there is a similar behavior of the indices.

According to him, “If it hadn’t been for those three stocks, the conversation about the performance of the stock market would have been different, and then the conversation between investors and economists, and perhaps the central bank – would have been different. When you read that the stock market is at its peak, you get the impression that everything is fine, inflation will soon decrease, interest rates will decrease. But when you say that most The stocks have gone down and for three months the average stock in the S&P 500 index has done nothing – this says something about the economy, which is not in the best shape, when you look only at the index, a misleading presentation is created.” In his estimation, this discourse also affects the US central bank and its decisions.

“A familiar phenomenon, the intensity is unusual”

Zabrzynski also mentions a number of negative developments outside the US, which weighed on the markets, among them falling rates in Europe following the elections to the European Parliament, Putin’s toughening of the conditions for ending the war in Ukraine and declines in the Chinese stock market.

How unusual is this phenomenon? Already last year we saw the “Magnificent Seven” that boosted the index.
“The phenomenon is not new, but its strength has become extraordinary. It has existed for some time, and in recent years we have seen a similar phenomenon in declines – in 2022 the shares will fall more. They are constantly disconnected from the market. I think this expresses a certain risk.”

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By Editor

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