Look this bull market in the mouth, and it seems like four out of five doctors will tell you its got a classic, open-and-shut case of bad breadth.
Stocks have rallied for the past nine months despite aggressive rate hikes and widespread recession fears. But the boom isnt sufficiently broad, the naysayers insist. Instead, it looks narrow, hollow and fragile.
Accordingly, these would-be physicians of finance would like to see the gains demonstrate more breadth that is, markedly more stocks doing well versus badly. Sounds reasonable, right?
In fact, this diagnosis reeks of quackery. And Id like to explain why this is important for your financial health.
Stepping back, its only logical that the boom weve got now is slow-breadth. In a slow-growth economy with widespread recession fears, investors seek highest-quality, all-weather growth and should pay up for it. Safety rises, on average, with size. Few huge, high-quality growth firms exist. So breadth shrinks, but markets rise.
Some swear were in the throes of AI froth. Im skeptical that artificial intelligence can be as big and grow as fast as many hope. Still, few of these leading stocks have any real and significant revenue or cost savings coming from AI in the next five years and dont claim to.
No, this rise is all about the highest quality, most assured growth, not the fastest maybe growth. And means the biggest of the big, selling at high valuations and getting higher. Thats mostly tech, but also Europes luxury goods leaders.
So yes, theres no denying it the recent breadth has indeed been bad. The thing is, bad breadth is actually bullish.
Weve already seen the market drop quickly and dramatically. On top of that, were still awash in bearish sentiment. As previously discussed in this column, this widespread doom and gloom whether its the Fed, the Ukraine invasion, or the latest banking crisis is actually bullish for stocks.
This is what we call fear of a false factor. False fear is always hurting prices in a given moment, setting the stage for spring-loaded gains. Bad breadth is the latest such false fear and it screams that this mega-cap-led surge has legs maybe not this week or this month, but fully through 2023.
Breadth has been invoked by bearish analysts since the early 1900s, when advance/decline lines were popular trend tellers. They believed top-heavy markets with few stellar stars topple when those few leaders lose luster.
The legend lives like some horrible halitosis but again, falsely.
At Januarys end, more than 60% of S&P 500 stocks outperformed the index over the prior year. By May 31, however, just 34.3% were outperforming the fastest plunge on record since reliable breadth data started in 1965. Likewise, the percent of S&P 500 constituents closing above their 200-day moving average fell below 15% last June and September only the eighth and ninth such occurrences since 1990.
Scary, right?
On the contrary: Throughout the middling and longer periods that matter to most investors, imploding breadth is historically ultra-bullish. Of three other breadth swoons approaching 2023s record size, one in 1969 came mid-bear-market and soon before a 32-month bull market erupted, delivering 74% gains. The others came during early bull cycle corrections: in 1984, three years before stocks peaked, and in 2003, just months into a five-year bull market.
Similarly, extreme low percentages of stocks eclipsing their 200-day moving averages precede booms, not busts. Take the seven deep troughs before 2022s. Three months later, stocks were higher 86% of the time. Ditto for returns 6 and 12 months out. Median S&P 500 returns three months later were 10.6%. After 6 months, 18.1%. A year? 25.4%.
Breadth can stink for years in rising markets. In late 1996 as a Forbes columnist, I urged buying the biggest 50 stocks. By April 1997, I narrowed that to 35 as stocks climbed. In early 1999, I narrowed to the 25 largest.
Another year of great gains remained — four big, bull-market, bad-breadth years.
How long will this bad breadth linger? Until optimism overcomes skepticism. It is just more of the pessimism of disbelief that Ive harped upon in this column for most of the past year. Check to see you might suffer from this doom-and-gloom affliction yourself, and if so, get rid of it.
Yes, this is partly about confidence. Those who stick with the market are going to do great. So please: Dont worry about bad breadth.
Ken Fisher is the founder and executive chairman of Fisher Investments, a four-time New York Times bestselling author, and regular columnist in 17 countries globally.
