Commentary by Joe Clark
Hoosiers are familiar with weather warnings, especially “flash floods” this summer. Unfortunately, however, we don’t receive similar alerts regarding our retirement accounts.
Just as weather changes quickly, so do the markets. The two issues discussed below are merely warning signs that things could change abruptly. These “alerts” stem from a lack of market participation as measured in terms of breadth and the range between various sectors within our economy.
Alert 1: A few big players. The S&P 500 is market capital weighted. The formula for market cap is one share of a company’s stock multiplied by the number of shares outstanding or owned by investors. There are companies with billions of shares outstanding and others with millions so the price of one share reveals little about market capitalization.
Ideally, we would see many individual S&P 500 stocks posting new highs as the index reaches new levels. That’s not happening now. When we compare the market cap weighted S&P 500 versus the same stocks but equally weighted, we find vast differences in performance. The equal weight stocks are dramatically underperforming the cap-weighted index, showing that the current market is being led by a handful of large companies. That doesn’t guarantee gloomy investment weather ahead, but it must change course or other storms will arrive.
Alert 2: Volatile sectors. The S&P 500 index is composed of nine sectors representing different parts of the economy. Variance in returns among the sectors is another alert. As I write this column, the S&P 500 index is up 3 percent year-to-date. The healthcare portion is up more than 12 percent while the energy sector is down more than 9 percent! Though it’s not unusual to see vast differences between best and worst performing sectors; according to Adam O’Dell, editor of the Cycle 9 Alert, the relative spread between the two coupled with overall meager returns on the index suggests market volatility could be in the forecast. The defensive sectors – the ones that tend to do the best relatively in times of economic struggles – are also the current out performers.
With weather and investing, stay alert to changing conditions.
Joseph “Big Joe” Clark is a Certified Financial Planner and the Managing Partner of Financial Enhancement Group, LLC an SEC registered Investment Advisor. Big Joe can be reached at firstname.lastname@example.org, or (765) 640-1524.