U.S. Stocks Remain in a Strong Bull Market
DataTrek Research has revealed that despite recent choppiness, U.S. stocks are still experiencing a robust bull market. By analyzing the correlations between 11 S&P 500 sectors and the major index, some positive trends have emerged.
Investors have shifted their focus from macroeconomic forces to fundamentals, aiming to outperform by selecting winning sectors and stocks in the bull market. Nicholas Colas, co-founder of DataTrek Research, expressed his confidence in the current state of U.S. large caps. He stated, "Investors are still prioritizing fundamentals over macro issues, as they should. While stocks may need some time before they rally again, the correlation data indicates that we are still in a longer-term bull market."
In bull markets, investors typically aim to surpass the broader stock market by choosing top-performing sectors and stocks. This places greater importance on corporate and industry fundamentals rather than macroeconomic factors like interest rates, recession risks, and geopolitical concerns. Consequently, the correlation between S&P 500 sectors and the index tends to be lower than average because bull markets witness both winners and losers, resulting in a gradual upward movement for the index.
To illustrate this phenomenon, the chart below showcases data compiled by DataTrek over the past five years:
| Time Period | Average Correlation | |-------------|-------------------------| | Last 5 Years | 0.83 |
When the correlation value between the five largest sectors in the S&P 500 and the overall index consistently falls below 0.83, it indicates that a bull market is in progress. However, if this correlation reaches and maintains a value of 0.9 for several weeks, it suggests that stocks are experiencing a bear market.
Bull Market Continues Despite Economic Challenges
According to market analyst Colas, the current market trend indicates that we are currently in a bull market. This can be attributed to below-average correlations observed since mid-April 2023, which continue to persist. The S&P 500, after experiencing its longest bear-market run since 1948, entered the bull market in early June. Remarkably, the S&P 500 Consumer Discretionary Sector and the Communication Services Sector have seen significant gains of 35.5% and 44.1% year to date, respectively. In comparison, the S&P 500 has achieved a more modest gain of 16.6% this year, as reported by FactSet data.
However, certain sectors have not fared as well during this time. The S&P 500 Consumer Staples Sector experienced a decline of 2.9%, while the Utilities Sector dropped by 10.6% over the same period.
A Shift from Last Year's Patterns
This year's performance represents a notable change in the stock market environment. It stands in stark contrast to the circumstances witnessed in 2022 when bear markets resulted in few strong performers and a general unraveling of assets simultaneously. Colas explains that during market downturns, investors aim to preserve capital by divesting from various investments, avoiding further losses driven by macroeconomic conditions that overshadow company fundamentals.
In the year prior, almost all S&P 500 sectors experienced losses in terms of total return, with only the Energy and Utilities sectors managing to generate positive returns. This situation arose due to soaring inflation, leading the Federal Reserve to raise interest rates seven times as part of their campaign to rein in prices. Consequently, the S&P 500 suffered a significant decline of 19.4%, marking its worst performance since the 2008 financial crisis.
Market Activity and Upcoming Inflation Data
Looking at the current market situation, U.S. stocks experienced mixed performance on Tuesday afternoon. Investors eagerly awaited the publication of the August inflation reading from the consumer-price index on Wednesday morning. At that time, the S&P 500 was showing a decline of 0.4%, the Nasdaq Composite was down 0.8%, and the Dow Jones Industrial Average was slightly rising by 0.1%.
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