September 18, 2023
Good morning,
Last week’s data-dump turned out to be a very mixed affair for equities. A spike higher in energy prices and the onset of a U.S. auto-workers strike on Friday wiped out week-to-date market gains, and left U.S. equity indexes down modestly on the week. The S&P 500 Index, for example, was off -1.22% on Friday, down -0.16% for the week and was again the best of the U.S. Indexes. International indexes were up a percent by comparison.
All of last week’s news, data and market choppiness served as a run-up to this week’s Fed meeting. Market expectations (based on rate futures) are for another rate pause on Wednesday, but with inflation concerns lingering and the economy still proving resilient, the Fed will likely continue to signal the potential for another rate hike before year-end.
Amidst the market choppiness over the past few weeks, new highs in concentration have been reached by the top stocks as a percentage of the market cap. The concertation was already extreme in May, when we talked about this last. The names and three sectors remain the same — Information Technology (Apple, Microsoft and Nvidia), Consumer Discretionary (Amazon and Tesla), and Communication Services (Meta and Alphabet, class A and C). Today’s level exceeds the periods of concentration in early 2000, mid-to-late 2020, and late 2021. After the concentration in 2000 and 2021, the megacaps weighed down the rest of the market and bear markets ensued. After the concentration of 2020, the advance broadened out and the bull market strengthened. Will the current concentration lead to an outcome reminiscent of 2020, or is it the precursor of a bear market, as in 2000 and 2021?
Unknown at the moment. The next period does not have to be as dramatic as those following the previous high concentration periods, either up or down. I do think the fact that the recent high has developed in a less than bullish tape does tilt toward a less than bullish outcome. Either way, broader breadth will have to develop in the days and weeks ahead for the bullish outcome to prevail. We shall see. See you Thursday morning.
Be well,
Mike
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