The rise of the US stock market is mainly driven by a few large Technology companies, and their success may mask the underlying weaknesses of the broader market.
The Nasdaq Composite Index broke through 20,000 points for the first time last Wednesday, rising from 10,000 points to this level in less than five years. Just a few weeks ago, the S&P 500 Index also crossed 6,000 points for the first time, but this excitement quickly faded.
After reaching the milestone, the Nasdaq Index quickly retraced its gains, rising only 0.3% last week, closing at 19,927 points. The S&P 500 Index fell 0.6%, and the Dow Jones Industrial Average dropped 1.8%, marking seven consecutive days of declines when it closed last Friday.
The rally in the Nasdaq Index was primarily driven by a few large Technology companies such as Tesla and Alphabet, and their success may have masked the fundamental weaknesses of the broader market.
Most non-technology sector Stocks have been experiencing a slow but steady sell-off. According to Dow Jones market data, the number of Stocks in the S&P 500 Index that fell exceeded those that rose over the past ten consecutive days, the longest such stretch since 2000.
Notably, seemingly cheap Stocks have become even cheaper. The iShares S&P 500 Value ETF fell for ten consecutive days, the worst performance since its launch in 2000. While its daily declines were not large and more like a gradual drop, this led to a decline of about 4% in the index over two weeks, indicating the extent to which the recent rally was driven by the most expensive Stocks.
How severe is the situation for value investors?
Famous value investor Bill Nygren recounted that last week, when he bought a razor at a pharmacy, a staff member recognized him and said, 'I bet your portfolio hasn't risen as much as mine. All my money is invested in Bitcoin.' Nygren recalled, 'And you know, he was right. My portfolio hasn't risen as much as his.'
This Oakmark fund manager has achieved relatively good performance this year even without investing in Digital Currency. As of last Thursday, his fund's ROI was 20%, while the iShares Value ETF was at 17%, and the S&P 500 Index was at 29%. Nygren scoffed at the bragging of this employee, stating, "There will always be someone who profits from things we do not understand."
Some of Nygren's bets have already paid off. One of the winners is General Motors, which is one of his largest Hold Positions. He said that General Motors, while the broader market sold Stocks, actively repurchased its own Stocks and succeeded. It has transformed from a "frustrating" Stock into a top performer, rising 46% this year.
Nygren compared General Motors' strategy to that of MicroStrategy, which is a Software company issuing more Stocks to buy Bitcoin. Normally, this would not be considered Shareholder-friendly, but nonetheless, the Stock has risen nearly 500% this year, and almost 4% in the past week.
However, Nygren said that at some point, the situation may reverse, stating, "We never know when the market will correct the valuation gap, which is why patience is needed as a value investor."
Investors do not need to worry about the huge gap between winners and losers right now, as it may just be noise. "We are all taught that a broader rebound is better, yet this is clearly completely the opposite in the context of the S&P 500 Index," wrote Steve Sosnick, chief strategist at Interactive Brokers. "I wish I could assert that this is a meaningful signal, but it may just be a statistical anomaly."
This means that investors should still feel relatively secure about holding Stocks as the holiday season approaches. "The party can continue, Santa can come, whether on a sleigh or through interest rate cuts," he added. "But savvy traders should at least pay attention to some warning signs regarding the overall health of the market, after all, after a party, people usually have a hangover."
