U.S. Equities: Defanging a Major Market Misconception | Lord Abbett
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Market View

In a preview of a forthcoming Lord Abbett whitepaper, our experts debunk the myth that the current market advance is being led chiefly by gains in “Big Tech” names.

Read time: 2 minutes

Here, Market View presents an excerpt from a whitepaper, “Five Equity Myths that May Be Derailing Investors,” scheduled to publish the week of February 1. We urge you to read or download the full article when it becomes available.

Myth: “It’s a narrow market”

Narrow leadership (i.e., when gains in market indexes are led by a relatively small number of stocks) has at certain times in history presaged a bear market in U.S. equities. Right now, we are hearing claims from some commentators that the current market advance is being paced by a small cadre of mega caps, and that it’s an unhealthy market otherwise. This seems like a nice yarn considering all the fun acronyms currently characterizing “Big Tech” (FANG, FAAMG etc.),1 whose strong price appreciation has captured investor and media attention, but actual data suggests the exact opposite.

How so? There is incredibly strong breadth in the equity market today, in our view. One way we monitor market breadth is through the percentage of constituents within the Russell 3000® Index that are trading above their individual 150-day moving average (MA). As Figure 1 shows, this indicator has exhibited particular strength over the most recent quarter, with over 80% of stocks in the Russell 3000® trading above their individual 150-day MA. We think this greater participation reflects in part a rebound in cyclical stocks because of investor expectations of a strengthening U.S. economic recovery in 2021, as COVID-19 vaccines are rolled out on a large scale, enabling an end to the pandemic crisis.

 

Figure 1. U.S. Equities Are Not Short of Breadth

Percentage of stocks in the Russell 3000 Index trading above their 150-day moving average for the period January 20, 2006–January 21, 2021

Source: FactSet. Data as of January 21, 2021. A moving average (MA) is a technique often used in technical analysis (see below) that smooths price histories by averaging daily prices over some period of time. The percentage of stocks in a given benchmark trading above or below a selected moving average is a common measure of market breadth, or how many stocks are taking part in a given move in an index or on a stock exchange.
The information shown is for illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment. Statements concerning financial market trends are based on current market conditions, which will fluctuate. There is no guarantee that markets will perform in a similar manner under similar conditions in the future.

 

Historically, this strength typically has been a bullish signal over the intermediate and long-term periods, as increasing breadth has been an indication of strong forward returns. Based on data stretching back to 1994, when more than 70% of the constituents of the broader market (as represented by the S&P 500® Index) are trading above their 200-day moving average, there have been above-average returns over the next six to 12 months.3

Critics may point out that the high percentage of constituents trading above their respective 150-day moving averages suggests an impending pullback. In our view, and based on the history cited above, the more likely potential outcome is a strong equity market in 2021, with a modest consolidation in breadth. That remains a bullish scenario. As we have noted, we expect over the next decade a widening separation between winners and laggards as a result of technological innovation, which will undoubtedly moderate the high level of breadth today. But we believe a significant number of innovation-oriented companies will continue to deliver outsized fundamental strength, while many durable and oversold names should make strong comebacks this year and beyond. To be sure, there likely will also be permanent casualties from COVID along with continued secular decline in some vulnerable areas of the economy.

Thus, in such a period where breadth is so strong, and earnings are likely continue outpacing low expectations, we believe equity markets remain attractive, but it is imperative for investors to consider a selective approach based on rigorous fundamental research.

 

1Investors have encountered a bewildering variety of acronymic descriptors of leading mega cap technology shares, formed by varying combinations of the first letters of Facebook, Google or its parent Alphabet Inc., Amazon, Netflix, Apple, and Microsoft.

2Market breadth or market participation refers to how many stocks are taking part in a given move in an index or on a stock exchange. One common measure of market breadth is the percentage of stocks in a given benchmark trading above or below a selected moving average. A moving average is a technique often used in technical analysis that smooths price histories by averaging daily prices over a defined period.

3 “Screening for New Leadership: Momentum Supported by Q4 Tailwinds,” Oppenheimer Equity Research, October 17, 2020.

 

A Note about Risk: The value of investments in equity securities will fluctuate in response to general economic conditions and to changes in the prospects of particular companies and/or sectors in the economy. While growth stocks are subject to the daily ups and downs of the stock market, their long-term potential as well as their volatility can be substantial. Value investing involves the risk that the market may not recognize that securities are undervalued, and they may not appreciate as anticipated. Smaller companies tend to be more volatile and less liquid than larger companies. Small cap companies may also have more limited product lines, markets, or financial resources and typically experience a higher risk of failure than large cap companies. The value of an investment in fixed-income securities will change as interest rates fluctuate and in response to market movements. As interest rates fall, the prices of debt securities tend to rise. As rates rise, prices tend to fall.

No investing strategy can overcome all market volatility or guarantee future results. 

Forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee.

This Market View may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize, or that actual returns or results will not be materially different from those described here.

Statements concerning financial market trends are based on current market conditions, which will fluctuate. There is no guarantee that markets will perform in a similar manner under similar conditions in the future.

Glossary and Index Definitions

The Russell 3000® Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market.

The S&P 500® Index is widely regarded as the standard for measuring large cap U.S. stock market performance and includes a representative sample of leading companies in leading industries.

Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment.

The information provided herein is not directed at any investor or category of investors and is provided solely as general information about our products and services and to otherwise provide general investment education.  No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as Lord, Abbett & Co LLC (and its affiliates, “Lord Abbett”) is not undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity with respect to the materials presented herein.   If you are an individual retirement investor, contact your financial advisor or other non-Lord Abbett fiduciary about whether any given investment idea, strategy, product, or service described herein may be appropriate for your circumstances.

The opinions in this Market View are as of the date of publication, are subject to change based on subsequent developments, and may not reflect the views of the firm as a whole. The material is not intended to be relied upon as a forecast, research, or investment advice, is not a recommendation or offer to buy or sell any securities or to adopt any investment strategy, and is not intended to predict or depict the performance of any investment. Readers should not assume that investments in companies, securities, sectors, and/or markets described were or will be profitable. Investing involves risk, including possible loss of principal. This document is prepared based on the information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.

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