The Bear Market That Isn't
Editor's note: Look beyond the doom and gloom...
Investors fled the markets en masse in 2022 as out-of-control inflation and ongoing global supply-chain issues led to a massive downtrend for many stocks. But not every sector plummeted, meaning you can still uncover buying opportunities in today's uncertain market...
That's why Joel Litman – chief investment strategist for our corporate affiliate Altimetry – believes it's crucial for investors to avoid waiting on the sidelines in order to take advantage of this setup.
In today's Masters Series, originally from the February 13 issue of the free Altimetry Daily Authority e-letter, Joel discusses a critical flaw that the major stock indexes suffer from... explains why sectors that struggled last year could have huge turnarounds in 2023... and details how investors can position themselves to profit from this market shift...
The Bear Market That Isn't
Folks think it's time to sound the alarms...
There has been a great deal of ink spilled about how we entered a bear market last year... and about how stocks came crashing down from their phenomenal performance in 2021.
At the end of 2022, the Nasdaq Composite Index was down 35% from its all-time high. Even after a strong January rally, it's still down about 27% from its peak. The tech sector's awful 2022 has clearly pushed the index into a bear market.
Likewise, the S&P 500 Index finished the year down 19% – though it fell as much as 25% from its peak. Today, it's still down about 15%.
Looking at those numbers, it seems obvious that the market took a turn for the worse in 2022...
But what if I told you that stocks didn't actually have a bad year?
As I'll explain today, these indexes suffer from a fatal flaw... and it's making last year's performance look a lot worse than it should.
When you dig into the data, you'll see that lots of industries did well in 2022. And many of them are set to continue that momentum this year.
The world's biggest companies tanked the overall performance of major indexes...
You see, the major indexes are what's called "market-cap weighted." That means companies with larger market caps have a larger effect on the whole index.
And that's why the underlying performance of the stock market hasn't been as terrible as it seems on the surface.
For example, let's look at two companies in the S&P 500 – tech giant Apple (AAPL) and air carrier Delta Air Lines (DAL). Apple has a market cap of more than $2 trillion. Delta's market cap is only about $25 billion.
If both stocks climb 5% in a day, Apple's rise has a 100 times bigger impact than Delta's.
You've probably realized the problem by now... It just so happens that most of the very biggest companies are tech giants. And tech had a difficult 2022.
Fortunately, there's a better way to get a feel for the market's performance...
We can do this through something called the S&P 500 Equal Weight Index. Rather than weighting companies by market cap, it assigns every company a 0.2% weighting.
This ensures it's not biased toward mega-cap tech titans like Apple and Microsoft (MSFT).
The index bottomed out last September, down about 22%. It closed the year down around 13%. Even more impressive, it's only down 7% since the start of 2022.
Take a look at the following chart. It shows the 2022 performances of the Invesco S&P 500 Equal Weight Fund (RSP) – which tracks the equal-weight S&P 500 – and the SPDR S&P 500 Fund (SPY), which tracks the standard S&P.
As you can see, the equal-weight fund recorded minimal losses in 2022. The market-cap-weighted fund performed much worse...
The point is simple. It's not that the entire market tanked in 2022. In fact, tech accounted for most of the losses... and it led the way for years. For the first time in a long time, gains weren't all but guaranteed.
If you picked good companies last year, you still could've done much better than the market.
Not every sector had a horrible year...
Tech and real estate struggled in 2022 for obvious reasons. Higher interest rates wiped out valuations, venture-capital lending disappeared, and slowing growth crushed expectations.
We can see this through a number of exchange-traded funds ("ETFs")... like the Technology Select Sector SPDR Fund (XLK) and the Real Estate Select Sector SPDR Fund (XLRE), which track a basket of tech and real estate stocks, respectively.
Both funds are currently down around 19% from their highs. And both bottomed more than 33% below their peaks last year.
On the other hand, rising interest rates actually benefited the financial sector. Financials can make more money when interest rates are high. We also haven't seen waves of defaults, which would be troublesome for them.
Industrials had a good year, too, because of the "supply-chain supercycle" – which we've been talking about since mid-2021. It's our term for the massive wave of investment in U.S. infrastructure as we bring our supply chains closer to home.
The Financial Select Sector SPDR Fund (XLF) is only down about 6% since the start of 2022. And the Industrial Select Sector SPDR Fund (XLI) remains roughly flat in the same time frame.
The same headwinds that hurt real estate and tech are the key drivers that allowed financials and industrials to outperform.
To make money in today's markets, you don't have to worry about where all stocks are going...
The days of everything going up, up, up are over... for now. That doesn't mean there are no opportunities left.
Choosing the right sector can help your portfolio buck the broader market. That advice applies no matter where stocks go from here.
So pay attention to themes... not to fund managers blaming a down market for their poor performance. We think the same sectors that did well last year are still positioned to win in 2023.
Regards,
Joel Litman
Editor's note: Chaikin Analytics founder Marc Chaikin and Joel recently joined forces to discuss a financial crisis that's poised to devastate the markets – one that could determine your wealth for the next decade...
They believe what's coming next could trigger both huge gains and losses. But you could earn 5 times gains if you begin preparing now, so you can't afford to miss out. Watch the full replay here...