The S&P 500 is up 8% this year, but most stocks are down—here’s what it means for your money

Stock prices slid on Tuesday as investors began to worry that U.S. debt ceiling negotiations had yielded little progress on a deal.

It was the latest piece of bad news in what has otherwise been an extremely resilient year for stocks.

The U.S. government hit its borrowing limit in January, prompting the Treasury to take “extraordinary measures” to continue paying its bills. Negotiations on raising the U.S. debt ceiling have been at a stalemate ever since, a situation that could trigger a default on U.S. debt if an agreement isn’t reached by early June.

Meanwhile, the Federal Reserve has continued its regime of interest rate hikes in an effort to cool still-high inflation. Many market watchers believe these efforts to slow the economy could tip it into recession territory. In fact, more than two-thirds of Americans (68%) expect a recession in the next six months, according to a recent survey from Nationwide.

But so far this year, through May 23, the S&P 500 index is up 8%.

What gives? Do market prognosticators know something that the rest of us seemingly don’t?

Part of the answer may lie in a measure known as market breadth. Technical analysts, who specialize in following the way the markets move, use breadth to determine the strength or weakness of a trend in the stock market or to gauge overall market sentiment.

Within a given market index, if more stocks are going up than down, an upward trend in the market is thought to be strong. If most of the stocks in a rising market are struggling, propped up by a few big winners, then you might be on shakier ground.

So what’s going on this year? In the S&P 500, despite an overall positive return, the median stock is down -0.2%. More stocks in the index are down than up.

What today’s market breadth means for your money

Wait a minute, you may be thinking. How could a market index be up when most of its constituents are down?

The S&P 500, like most major market barometers, is weighted by market capitalization. Essentially, the bigger a company is, the more room it takes up in the index. As a result, these indexes can get top heavy. Currently, the top 10 stocks in the S&P account for 30% of the index.

Lately, investors have been flocking into so-called “mega-caps” — the largest companies on the market — and driving up their share prices. Apple and Microsoft, which together account for 14% of the S&P, have each returned 32% in 2023. Third-largest firm Alphabet is up 39%. And No. 5 firm NVIDIA has logged an eye-watering 110% return.

“We’ve seen this move back to mega-caps, which lifts the overall index,” says Liz Ann Sonders, managing director and chief investment strategist at Charles Schwab. “It’s sort of the generals leading the charge where most of the soldiers are falling behind.”

It’s a common metaphor — one that means stocks’ move upward isn’t as strong as it may seem.

It’s not the only place analysts are seeing contradictions. While polls show that investors have a negative outlook on the stock market, those same people still have above-average exposure to stocks, says Willie Delwiche, an investment analyst and founder of Hi Mount Research.

“It’s a very weird dynamic that people report pessimism, but their actions don’t support that,” he says.

Taken together, the two indicators suggests a fragility in this year’s bull market that’s worth keeping an eye on. That doesn’t necessarily mean you should brace for prices to come crashing down, but it’s a good reason to avoid making super-bullish bets, such as piling into the sorts of riskier assets that took off in 2020 and 2021.

“This is a dramatically different environment than the one we saw in late 2020. So if you’re expecting a repeat of that, I think it’s a recipe for disappointment,” says Delwiche. “Where investors get into trouble is if they have certain expectations and those expectations don’t get met.”

That doesn’t mean you should flock to the market’s recent winners either, points out Sonders. “This isn’t the environment to be monolithic. It’s not the time to make a sector call or two,” she says.

Rather, you’d be wise to stick to your long-term plans and keep your investments diversified. In doing so, you lessen the chances that a drawdown in any one particular type of investment will do lasting damage to your portfolio.

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