The mood music is changing on Wall Street as markets continue to rally. Investors are shrugging off fears of a recession and buying up stocks in the hope that recent gains will sustain into a bull-market run.
The S&P 500 hit new highs, officially entering bull market territory on June 8 and exiting one of the longest bear markets – 248 trading days – in a decade.
Are we out of the woods? Possibly. Yet a closer look under the hood market is causing some investors to do a double-take.
Just seven companies (and eight stocks) have accounted for more than the S&P 500’s total 9.65% return (price gains and reinvested dividends) across the first five months of 2023. These seven firms are making equities look hot again and, going the way they’re going, the market to deliver a handsome annualized gain of at least 23%. Take those seven out of the equation, and the S&P is actually down slightly for the opening five months of the year.
It’s what veteran markets reporter Alan Sloane calls the “skinny bull” – a tightly-concentrated burst of growth shooting up through an otherwise lackluster market.
This article will look closer at the dynamics of this peculiar market and canvass opinions from financial advisors on whether or not to get in the ring with this thing.
Hold on ‘Buckeroo
This market is no muscle-bound stud, but can it keep charging? “I believe the skinny bull has legs, for now,” Yohance Harrison, BFA, CRPC, and founder of Money Script Wealth. “The latest disaster we avoided was the debt ceiling. Since its resolution, there hasn’t been a real emotional headline to spook investors. Unless a new catalyst emerges, it could be smooth sailing for a little while.”
Whether the bull “has legs” depends on a variety of factors, according to Jorey Bernstein, CEO of Bernstein Investment Consultants. “If the companies leading the charge are fundamentally strong and can continue to deliver impressive growth, then it may be sustainable. However, given their outsized impact, these leading companies’ weaknesses could trigger a more significant market correction.”
The level of concentration in the market is at extremely high levels. At the peak of the dot-com bubble in March of 2000, the ten biggest stocks accounted for 20.3% of the FT Wilshire 5000 Index (which measures virtually all American publicly-traded firms). As of the end of last month, the top ten now account for 25.9% of the index.
“We are always headed for the next bubble. It’s not uncommon for a handful of stocks to drive most of an index move. Unfortunately, we don’t know we are in a bubble until it inevitably pops,” says Harrison. “Sometimes bubbles just slowly deflate, or another bubble out-paces the current. It is a good time to review your diversification strategies and consider adding non-correlated assets to your portfolio.”
Tech firms are leading this charge, so it’s no surprise that Nasdaq-based funds have been among the best-performing ETFs this year. Yet such high levels of concentration can make for a fragile market mood and expose investors to more specific sector risks they may not be fully aware of. For instance, amid the current tech-driven boom, investors may be more exposed to sector-specific risks (e.g., regulatory changes, technology disruptions) than they realize.
History shows the Nasdaq’s can quickly turn from gain to pain and fall right through the floor. This drop tower effect can send portfolios into a stomach-clinching free fall. This can spook investors who don’t know the best ways to respond to a stock market crash.
“From March 2000 to January 2003, the Nasdaq had 11 head fakes with rallies as high as 49%,” Amar Shah, CFA CIO of Client First Capital. “At the end of those three years, the Nasdaq was down close to 78%.”
The uncertainty surrounding this run reminds us one can never know what’s coming around the corner. Thankfully, a longer-term time horizon can put short-term setbacks in perspective.
“Long-term investing is like climbing a mountain. Steep inclines take your breath away. Switchbacks seem to stretch forever. Obstacles block your path. Valleys are disorienting,” Kevin Estes, Financial Planner and Founder of Scaled Finance.
“At times, it will feel like your steady contributions are evaporating because of poor market performance. They’re not. They’re buying low. Markets tend to rise like an escalator and fall like an elevator. Take heart. Time in the market is more important than timing the market.”
This bull market may appear flimsy, but it is repositioning investors’ portfolios much better than last year. There’s no way of knowing how long it may go. Yet, as with all market cycles, time spent in the market, as the adage goes, “it’s not about timing the market, but about time in the market.” By staying the distance, investors can build residual income over the long term. By focusing on the long-term investment horizon, investors can find the wherewithal to ride the ups and downs of the market and eventually generate solid returns for themselves.
Josh is a financial expert with over 15 years of experience on Wall Street as a senior market strategist and trader. His career has spanned from working on the New York Stock Exchange floor to investment management and portfolio trading at Citibank, Chicago Trading Company, and Flow Traders.
Josh graduated from Cornell University with a degree from the Dyson School of Applied Economics & Management at the SC Johnson College of Business. He has held multiple professional licenses during his career, including FINRA Series 3, 7, 24, 55, Nasdaq OMX, Xetra & Eurex (German), and SIX (Swiss) trading licenses. Josh served as a senior trader and strategist, business partner, and head of futures in his former roles on Wall Street.
Josh's work and authoritative advice have appeared in major publications like Nasdaq, Forbes, The Sun, Yahoo! Finance, CBS News, Fortune, The Street, MSN Money, and Go Banking Rates. Josh currently holds areas of expertise in investing, wealth management, capital markets, taxes, real estate, cryptocurrencies, and personal finance.
Josh currently runs a wealth management business and investment firm. Additionally, he is the founder and CEO of Top Dollar, where he teaches others how to build 6-figure passive income with smart money strategies that he uses professionally.