Market Update: March 31, 2023

 

You might not have guessed it based on all the crazy things happening in the news lately, but the market really hasn’t changed much these last two weeks. We’ve been in a tight trading range in the market cap weighted index and the price action actually looks fairly strong, all things considered. We’ll come back to that thought later.

In the news this week, the market finishes off the quarter in positive territory despite all the negative headlines. The White House calls for tougher regulations on midsized banks. And stress on the banking system has eased this week which have sent bond yields higher.

Going back to the pricing action in the S&P 500, just based off of this graph, the market looks reasonably strong. The S&P 500 broke the downward trading pattern earlier this year and has now established 3 possible higher lows since bottoming last October. Not even 3 large bank failures caused the market cap weighted index to register a lower low.

But if you look beneath the surface, you can see a bit more weakness in some areas of the market. Shown here in blue is the S&P 500 market cap weighted index. The purple line is the equal weighted index where every stock in the index causes an equal change. In other words, movements in the purple line are not dominated by the largest stocks in the index like Apple, Amazon, and Microsoft. With the onset of the bank liquidity crisis, we saw a fairly strong divergence between the market cap weighted index and the equal weight. While the blue line did decline, it has recovered quickly. The purple line saw a much more drastic decline and hasn’t yet recovered. This indicates that more stocks beyond the largest in the index are participating on the downside.

This is a pattern we have seen before in recent memory. The time period you’re looking at here is between the summer of 2021 and the summer of 2022, where we last saw all-time highs in the S&P 500. Leading into the peak in January of 2022, the S&P 500 continued to register new highs. However, the equal weighted index diverged from the S&P 500, signaling the onset of a bear market that began in January of 2022. Essentially, when fewer stocks participate in a rally, that could signal a weaker market than the index might otherwise indicate.

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Sources:

1.FactSet Research Systems. (n.d.). S&P 500 (Interactive Charts). Retrieved March 31, 2023, from FactSet Database.

FactSet Research Systems. (n.d.). S&P 500 & S&P 500 Equal Weight (Interactive Charts). Retrieved March 31, 2023, from FactSet DatabaseDisclosures:

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