The performance of U.S. stocks over the past four years has been like the 1960s Boston Celtics: Dominant, unbeatable and just plain extraordinary.
Despite the sizzling historical performance for U.S. stocks, the recent underperformance of smaller stocks could be a signal of broader stock market weakness ahead.
The year-to-date (YTD) performance for large-, mid- and small-cap U.S. stocks is still marginally up (between 1.5% and 2.9%), yet over the past three months, performance is deteriorating and negative for all three groups.
Losses in mid-cap and small-cap stocks are in the 2% to 3% range, whereas larger stocks are holding up better. More importantly, the fact that mid- and small-caps are now laggards is a signal that risk appetite for smaller and riskier companies is waning.
Over the past several weeks, market technicians along with the Technical Forecast published by ETFguide have observed that stock market breadth is poor. On the NYSE alone, almost 60% of stocks are trading below their 200-day moving average, which tells us that most stocks are in a downtrend.
Here’s another problem: Fewer stocks are participating in the rally. Just five companies – Apple, Amazon, Google, Facebook and Disney – have contributed 61% of the S&P 500’s year-to-date gain, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. In a healthy bull market, more stocks should be lifting broader indexes.
The Vanguard FTSE Emerging Markets ETF (VWO) has tumbled almost 15% over the past three months, led by the 18.94% crash in Chinese A-Shares, as tracked by the Deutsche X-Trackers Harvest CSI 300 China A-Shares ETF (ASHR). Could higher volatility in overseas securities be a prelude of what’s ahead for U.S. stocks?
Interestingly, the lack of significant pullback hasn’t held back the performance of defensive sectors like consumer staples (XLP), which have performed better than the broader S&P 500 thus far this year. Typically, defensive sectors will underperform when the general market is rising.