Market Breadth: Is a Transformation Underway?

The narrow nature of market returns over the past year is well documented. In summary, the largest capitalization tech stocks (the so-called Mag 7) have dominated market returns since the market correction bottomed out in late 2022. Directly in the chart below is how the various index returns looked since October 2022. The S&P 500 Index (purple line) and the Nasdaq Index (blue line) have both outperformed the rest of the market. The 17 percent return difference between the S&P 500 and the equal weighted S&P 500 (purple line versus the orange line─both indexes hold the same stocks, just in different weights) speaks to the impact of the Mag 7 on these indexes.

Despite this dominance, we may be witnessing a broadening of the market in recent months. The fourth quarter of 2023 saw a broadening of stock returns. Immediately below we show returns for the fourth quarter of 2023. That was an encouraging period for those of us wanting to see some breadth to market returns. Note the Russell 2000 small cap index in green leading all others.

We saw a return of Mag 7 market return dominance to start 2024. But we note in the past month we have once again witnessed a broadening of returns. Below is what it looks like. Small Caps have led (green line), Dividend Aristocrats Mid-Caps are next (brown line) and the NASDAQ is the laggard. We think this broadening is encouraging and a healthy indicator for the overall strength of the US economy. If the US economy stays healthy with positive GDP growth, it seems a reasonable expectation that a more balanced market with broader participation for the remainder of the year and beyond seems likely. If this transpires, it will bode well for the investment strategies we manage on behalf of our clients.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which Investment(s) may be appropriate for you, consult your financial advisor prior to investing. Information is based on sources believed to be reliable, however, their accuracy or completeness cannot be guaranteed.

No investment strategy can assure success or completely protect against loss, given the volatility of all securities markets. Statements of forecast and trends are for informational purposes and are not guaranteed to occur in the future. All performance referenced is historical and is no guarantee of future results. Securities investing involves risk, including loss of principal.

The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market. The composition of the NASDAQ Composite is heavily weighted towards information technology companies.

The S&P 500 Index, or Standard & Poor’s 500 Index, is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. The S&P 500 index is regarded as one of the best gauges of prominent American equities’ performance, and by extension, that of the stock market overall.

Equal-weight indices include the same constituents as their respective market-cap-weighted indices, but each company is allocated a fixed equal weight in the index at each quarterly rebalance.

The Russell 2000 tracks the roughly 2000 securities that are considered to be US small cap companies. The Russell 2000 serves as an important benchmark when investors want to track their small cap performances versus other sized companies. The Russell 2000 tends to have a larger standard deviation in comparison to the S&P 500.

S&P 400® Dividend Aristocrats® is designed to measure the performance of mid-sized companies within the S&P Mid Cap 400 that have consistently increased dividends every year for at least 15 years.

S&P 500® Dividend Aristocrats® measure the performance of S&P 500 companies that have increased dividends every year for the last 25 consecutive years. The Index treats each constituent as a distinct investment opportunity without regard to its size by equally weighting each company.

Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment.