US stocks remain in a strong bull market despite the recent turmoil, as correlations between eleven S&P 500 sectors and the main index provide some positive signals, according to DataTrek Research.
The S&P 500’s sector correlations with the large-cap index have been below average since mid-April, meaning investors are focusing more on fundamentals than macroeconomic forces as they try to outperform by picking sectors and stocks that they hope will gain over a certain period of time. bull market, said Nicholas Colas, co-founder of DataTrek Research.
“…by this metric, US large caps remain in good shape,” Colas wrote in a note on Tuesday. “Investors are still focused on fundamentals rather than macro issues, as they should be. Yes, stocks were ahead of themselves at the end of July and it will likely take some time before they move higher again, but the correlation data says we are in a longer-term bull market.”
Colas said normally in bull markets, investors hope to beat the broader stock market by picking the best gainers and sectors, so the fundamentals of companies and sectors are more important than macroeconomic factors such as interest rates, recession risks and geopolitical concerns.
As a result, the correlation between the S&P 500 sectors and the index would be lower than average because bull markets have both winners and losers, so the index moves slowly upward, Colas said.
The following diagram illustrates this dynamic. According to data collected by DataTrek, the average correlation of the five largest sectors in the S&P 500 with the index as a whole over the past five years was 0.83.
A correlation value close to zero indicates a weak relationship between the two variables being compared, while a value close to one means a strong correlation between them.
SOURCE: DATATREK RESEARCH
Colas said if correlations remain consistently below 0.83, a bull market is underway, but if they remain at 0.9 for more than a few weeks, it means the stock is in a bear market.
“Because of this measure, we are currently in a bull market. Correlations have remained below average since mid-April 2023 and remain so even now,” Colas said.
The S&P 500 SPX officially exited its longest bear market since 1948 and entered the bull market in early June. The S&P 500 Sector XX:SP500.25 and the Communications Services Sector XX:SP500.50 are up 34.8% and 43.4% year to date, respectively, compared to the S&P 500’s year-to-date gain of 16.2% this year, according to FactSet data. The S&P 500 Sector XX:SP500.30 Consumer Staples fell 3.2%, while the Utilities Sector XX:SP500.55 fell 10.6% over the same period.
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What happened this year is a welcome change for the stock market, but it’s a mirror image of 2022 as bear markets offer very few strong performers, so everything is unraveling at the same time, Colas said.
In a market downturn, investors would try to preserve their capital by selling “essentially everything” to avoid further losses when macroeconomic conditions trump companies’ fundamentals, he said.
Last year, every S&P 500 sector lost money on a total return basis except the Energy XX:SP500.10 and Utilities sectors, as runaway inflation forced the Federal Reserve to raise rates seven times a year in a campaign to boost prices. to get under control. The S&P 500 fell 19.4%, having its worst year since the 2008 financial crisis.
U.S. stocks closed lower on Tuesday as investors looked ahead to widely expected August inflation based on Wednesday morning’s consumer price index. The S&P 500 lost 0.6% and the Nasdaq Composite COMP fell 1%, while the Dow Jones Industrial Average DJIA fell less than 0.1%.
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