As we ended last week, we talked about the important signals given from Chinese markets on the prospects of a U.S./China trade deal.
Chinese stocks and the Chinese currency have been signaling China is prepared to make the necessary concessions to get a deal done.
We opened the week with more positive news on that front. That has driven the S&P 500 back above the December 3rd highs (just before the market collapsed 20% in 15 days).
So we’ve now had a full recovery of the December losses. But we remain 5% off of the all-time highs. Where do we go from here?
Let’s take a look at the breadth of participation in this recovery for stocks, for clues. As we know, by design, the big market cap stocks contribute significantly to the performance of the S&P 500 (a cap weighted index). With that, in recent years, we’ve had booms in the tech giants that have masked weakness across broader stocks. It has been a market of some winners, and many losers.
That dynamic is changing. As of Friday’s close, if we looked at the equal-weighted S&P 500 index, it was up 14%. That’s a straight average performance of every constituent stock in the index. That compares to plus 11% for the cap-weighted index. This is the benchmark index we always hear about — deemed to be the proxy on global economic health and stability.
So what does the outperformance in the equal weighted index tell us?
It tells us that finally there is broad-based participation in the stock market. And I would argue, it’s telegraphing a real-broad based economic boom, supplanting the “winner takes all (gutting of industries) boom” we’ve seen over the past decade (i.e. the rise of the big tech “disrupters” thanks to regulatory negligence).
A more broadly followed breadth indicator, the advance-decline line, shows the number of stocks advancing versus those declining. And that indicator is hitting record highs. This indicates a healthy stock market, not a topping stock market.