A Narrow Market, Breadth is Bad…. What does it Mean?

Financial professionals often use jargon to convey what is happening in the capital markets. The goal of jargon may be precision, but the end result is often confusion. When analysts this week talked about bad market breadth and a narrow market, they were trying to convey that very big companies are doing extremely well while the “average” company has struggled.

Generally, a narrow market, in which performance is dominated by a few, is not a healthy one. When in a narrow market, nervous investors pile into the names that have worked well or that they are familiar with. This behavior is happening at the moment. The table below shows five of the largest companies and their weight in the S&P 500 plus their year to date return. These stocks are propelling the S&P 500 to its 8.6% gain this year because they carry the most weight and are materially outperforming the benchmark.

Another indicator highlighting the performance discrepancies can be seen in the outperformance of large cap stocks over small cap stocks. Large cap stocks as measured by the S&P 500 are up 8.58% this year while small cap stocks represented by the Russell 2000 are up 1.01%. Interestingly, the total market cap of Apple Inc, is now bigger than the entire market capitalization of the 2,000 smaller companies in the Russell 2000 index combined. In times of concern, investors target the names they know and that have worked well: In essence, large cap technology and communication stocks. We think those companies should be a part of a well-diversified portfolio. However, the real opportunity in today’s market may be with the other 400+ stocks in the S&P 500 or in small cap stocks that have lagged over the past few months.

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Source: Bloomberg, Seeking Alpha

The opinions expressed are those of Harrison Financial Services as of May 18, 2023 and are subject to change. There is no guarantee that any forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment or security. Please remember that all investments carry some level of risk, including the potential loss of principal invested. Indexes and/or benchmarks are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance and are not indicative of any specific investment. Diversification and strategic asset allocation do not assure profit or protect against loss.