BOSTON — Bull market? What bull market?
While the S&P 500 index SPX, +0.77% closed at another record on Tuesday, and both the Dow Jones Industrial Average DJIA, +0.67% and the Nasdaq Composite COMP, +0.75% are within sight of their own new highs, something different is hiding beneath the surface.
The average stock is doing much worse than most people realize, warns Andrew Lapthorne, quantitative strategist at SG Securities. In the U.S. and around the world, most stocks are “struggling,” he says, and they remain well below levels from 18 months ago.
You wouldn’t know from looking at the indexes, because they’re dominated by a few, booming big growth-oriented names — like Apple AAPL, +0.83% Microsoft MSFT, +0.64% and Amazon.com AMZN, +0.24% Traditional stock market indexes weight companies by their stock-market value, not equally.
Since January 2018, the S&P 500 has risen 11%. But among the broad universe of U.S. stocks worth more than $50 million, just over half are still in the red over that time, according to FactSet data. The median stock is down 0.7% over 18 months.
The picture around the world is even starker. About two-thirds of global stocks are lower, measured in U.S. dollars, than they were 18 months ago. The median decline is a remarkable 14%.
“They’re off the radar, and they’re suffering from cyclical malaise,” he says. “The S&P 500 is not a very good barometer of global prosperity… there are 11,000 other companies that are not doing so well.”
And this is especially acute when you look at smaller companies that arne not in “growth” industries. So-called “small cap value” stocks are still struggling. The MSCI US Small Value Index has fallen nearly 5% over 18 months. The tongue-twisting MSCI ACWI (All Country World Index) Small Value Index, the broadest index of small value stocks everywhere, is nearly 10% in the red.
Actually, we may have seen this movie before. Large-cap growth stocks dominated the market in the late 1990s. They boomed while smaller stocks, and especially the less exciting so-called “value” stocks, languished.
There’s no mystery to this. Investors chase performance. They buy what they know and what they hear about. And it becomes a vicious circle: Big, popular stock A goes up, so it gets lots of media coverage, so more people rush to buy it, so it goes up more.
Booming large-cap growth stocks “are being driven by fund flows, and they’re being driven by low bond yields,” says Lapthorne. (The low bond yields make money cheaper, and encourage investors to chase risky assets, including stocks)
When the dot-com bust happened in 2000, the big losses were in the most popular large-cap growth stocks. There was a sudden, massive shift toward smaller stocks and “value,” which then outperformed for about seven years.
Could this happen again? Only time will tell.
Lapthorne says this “malaise” affecting smaller stocks may mean they’re cheap and due for a rally — or that they’re signaling economic danger ahead that the headline indexes may be missing.
Logically, he says, if you think the global economy is going to go into recession you’d buy Treasury bonds. If you don’t, you’d bet on smaller, more value-oriented stocks catching up with the big names, on the grounds they’re more of a bargain.
Or, rationally, you might hedge yourself both ways: Build a portfolio of small value stocks — U.S. and overseas — and balance them with the long-dated, zero-coupon Treasury bonds that would be expected to jump if we get a recession.
