Stocks remain off to a winning start in 2023 despite rising recession fears and uncertainty around the stability of the banking sector. Take a closer look, however, it’s clear the market is far from moving in lockstep.
Instead, the S&P 500 has demonstrated a high degree of dispersion, a measure of the variation in returns within an index or a market.
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Dispersion is on display as investors jump quickly on a hot stock or other investing trend, and are even quicker to get out of industries and sectors heading lower, said stock-market technical analysts, who described the phenomenon as a sign investors lack conviction over market direction.
The S&P 500 posted a 7% gain in the first quarter of 2023 and a 3.5% advance in March. Dispersion in the index rose to 31% in March from 23% in the previous month, according to S&P Dow Jones Indices. March’s reading falls above the 75th percentile, historically.
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Among the 11 sectors of the S&P 500, information technology and communication services led the way in March, up 10.9% and 10.4%, respectively, thanks to robust gains in megacap growth and tech stocks. At the other end of the spectrum, the financials sector fell 9.7% after several regional bank failures undermined confidence in the financial system.
“The dispersion of returns among sectors and industry groups has been dramatic since most stocks bottomed in September and October of 2022,” said Mark Arbeter, president of Arbeter Investments, in a Thursday note. “This is typical in a market that has no direction, whose market participants are confused, in an uncertain economy both here and abroad, with massive disagreements over where market and government rates are going, with OPEC making waves, a war in Ukraine to deal with, etc.”
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Since the collapse of Silicon Valley Bank, Arbeter has observed a fast rotation of capital into defensive stocks such as consumer staples utilities and healthcare
All three sectors have had big moves over the last four weeks with the consumer staples sector rising 3.9% since March 8, when Silicon Valley Bank first announced it had to sell all available-for-sale securities to strengthen its deteriorating financial position. The utilities sector advanced 6.4% and healthcare gained 5.4% over the same period, according to Dow Jones Market Data.
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“It coincides exactly with a decrease in market interest rates,” Arbeter told MarketWatch in a follow-up interview. “When interest rates come down, especially the whole [yield] curve, it indicates that the market is increasingly worried about the economy slowing down or going into a recession perhaps this year.”
The yield on the 2-year Treasury note which is particularly sensitive to monetary policy expectations, fell to the lowest level since September on Wednesday, after topping 5% and rising to its highest level since 2007 in early March.
However, it jumped 15.2 basis points to 3.970% on Friday after employment data for March was seen boosting the chances of another Fed interest-rate hike next month. Fed-funds futures traders now see a 67% chance of a 25-basis-point hike in May, up from 49% a day ago, according to the CME FedWatch tool.
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The healthcare sector, which got hit hard between mid-December and late-March and lost over 8.4% during this period, bounced back 3.1% over the past five days.
“A lot of this has to do with so much indecision about the economy, about interest rates, about the war, about oil, that people don’t take long bets. They move very quickly and once something gets hot, momentum can be very strong both to the upside and the downside,” Arbeter said. “It’s just a very muddled picture.”
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Meanwhile, a dizzying rally in growth stocks faded this week as investors started to shift away from the tech sector amid signs that the U.S. economy is weakening. The tech-heavy Nasdaq Composite booked its first losing week in four on Thursday, after scoring the best quarter since 2020 just a week ago.
“Megacap tech has been a beneficiary of the selling in other sectors, but ultimately once that rotation was done, the indices would be quite vulnerable,” wrote Jonathan Krinsky, chief market technician at BTIG.
“This dispersion is something that often occurs in the latter innings of market rallies, and while there is always the chance that the weak catch up to the strong, we continue to see more evidence that it will go the other way, as participation continues to thin, leaving fewer and fewer names working.”
The U.S. stock market closed on Friday, in observance of Good Friday and will reopen on Monday.
