- Charles Schwab said market trends are similar to those seen in 2021, suggesting a bear market could be on the way.
- The gap between index levels and individual stock performance is widening
- Despite the market bull market, the number of individual stocks hitting new highs is declining.
Charles Schwab wrote this week that the current state of the stock market is beginning to mirror 2021, the year before the most recent bear market correction.
In its latest commentary, the bank noted a widening disconnect between index levels and the performance of individual stocks, which is becoming increasingly extreme and a risk worth monitoring, wrote Liz Ann Sonders, chief investment officer.
“If the weakness of the former and strength of the latter continues going forward, this will begin to eerily mimic 2021’s dynamics,” she wrote.
While the S&P 500 has been hitting record highs throughout the year, the percentage of individual stocks trading above their 50-day moving averages has been declining, she noted.
“That’s exactly what happened in the second half of 2021. In hindsight, it sent the right signals that the market would no longer be able to sustain index levels, leading to a bear market in 2022,” Ann Saunders said.
The benchmark index fell about 25% that year before beginning to rise in 2023.
The S&P 500 is down about 5% this year, but the individual stocks in the index are down an average of 15%. The Nasdaq is even worse, with individual stocks in the index down an average of 38%, Schwab said.
And as of last Friday, less than 10% of stocks listed on the S&P and Nasdaq had hit new 52-week highs. At the same time, the number of stocks hitting new lows is at bear market levels, the report added.
This index-level bull market is best explained by a narrow concentration of stocks, with AI-benefit stocks leading the way. But Ann Saunders noted that despite the frequent emphasis on the top tech giants, these aren’t necessarily the biggest names.
“You might also be surprised that three of this year’s top 10 best performing companies are not in the technology sector, but in the utilities sector,” she wrote. “We can thank the secondary beneficiaries of the boom in artificial intelligence (AI) and building the nation’s energy grid. The list also includes General Electric, making it an ‘old school’…weird!”
