Year-to-date the market, as measured by the S&P 500 Index, has been relatively calm. So far, the index has yet to fall more than 3.2% or rise more than 3.5%. In fact, this is only the fourth year – the others were 1952, 1993 and 2004 – the index has not been up or down more than 5% at any point through early June. The lack of volatility also extends to the Index’s day-to-day movement. December 18, 2014 was the last day that the S&P 500 was up or down as much as 2%. This string of 130 days without at least a 2% one-day move is the longest since the one ending in February 2007. According to data compiled by Bloomberg and Deutsche Bank AG, the last time the Index went without a 2% move in the year’s first half was 2005.
Through Friday’s market close, the S&P 500 was up 2.1% for the year and down 1.3% from its May 21 closing high. While it appears as if not much is happening on the surface, if we dig down a bit deeper we can see things are not as quite as they appear. Our analysis shows that 100 stocks in the S&P 500 are down 20% or more from their 52-week highs. The unofficial definition of a bear market is a market decline of 20% or more. This indicates that 20% of the stocks in the S&P are in bear market territory. A year ago only 21 stocks or 4% of the S&P 500 fell 20% or more from their highs.
Of the stocks that have declined by at least 20%, 22 reached their new highs earlier this year. There are nine Aerospace/Defense stocks in the S&P 500 – all of them are down more than 20% from the 52-week highs they reached earlier this year.
There have also been some changes in how the S&P 500’s constituents have performed on other metrics. Bespoke Investment Group broke up the S&P 500 into deciles (10 groups of 50 stocks each) based on dividend yield. Their research, which was published on June 23, found that stocks in the decile with the highest yields were the worst performers (down 5.3%) and those in the decile with the lowest yield (or no yield) generated the best returns (+9.8%). This is in stark contrast to 2014, when high dividend paying stocks generated the best returns.
A 20% or greater decline from the 52-week high for about 20% of the stocks in the S&P 500 could indicate a bear market or correction (a market decline of at least 10%) is approaching. On the other hand, it could represent a healthy rotation among the index’s constituents. What was performing well is now lagging, and vice versa.
David Rosenberg, chief economist and strategist at Gluskin Sheff notes that from 2012-2014, the S&P’s average annual gain was 18%. During this period, earnings increased by 5% annually. He posits that “The market is now in a resting period where the ‘E’ (earnings) has to play some catch up to the ‘P’ (price).”
Bespoke Investment Group also found that during the 10 years during which the S&P 500 stayed close to where it started over the year’s first 117 trading days, it rose by 6.6% on average for the balance of those 10 years.
We do not attempt to prognosticate short-term market movements. Any forecast we might make would be little more than a guess. Time is better spent trying to identify attractively valued stocks with the potential to deliver long-term gains to client portfolios. Perhaps one of the stocks that has fallen 20% or more could be such a stock.