Someone Ate My Bread

Someone Ate My Bread(th)?

I can’t remember anyone ever telling me that they don’t enjoy well-made, fresh bread, whether with a bowl of chili, some cheese and red wine, or as toast with their morning coffee.

Market breadth, on the other hand, may be something you’ve never heard of, let alone enjoyed. I thought we should take a few bites out of a concept that may be worth paying attention to.

Stock market breadth measures how many equities in each market are moving in the same direction. If the market is going up while stocks are going down, we could have a problem.

From Jared Dillian, The Daily Dirtnap:

“So, I guess OpenAI is coming in a little light on their revenue projections. This hit the market last Thursday, but things seem to have recovered. With stock market growth entirely predicated on the growth of AI, you think this would have a little more of an effect, but nobody cares. Keep shoveling that money into 401(k)s. Nothing matters.

Funny, because I go through the numbers on the stock market in my class, and I tell them that over the last 100 years, the stock market has returned 10% a year, and over the last 50 years, the stock market has returned 11% a year, and when I ask them if those returns are sustainable into the future, I kind of get the blank stare. Nobody knows.

Anyway, the point I am trying to make is that if you’re not really sure, then maybe you don’t want to put your entire life savings into something that you’re not really sure about. Hence, diversification. Speaking of diversification, if you own the SPX these days, you are not really diversified at all.”  (This comment reflects the author's opinion regarding investor sentiment and should not be interpreted as a forecast of future market performance.)

Let’s look at the S&P 500 index (the big U.S. companies) and the current situation. There are all sorts of numbers floating around but a few common ones are that around 40% of the S&P 500 is now represented by the “AI Big 10.” JP Morgan says that if you include the supply chains, that number is over 50%.

While some observers have compared current market concentration levels to previous periods such as the Nifty Fifty era or the late-1990s technology boom, market conditions differ significantly and historical comparisons should not be interpreted as predictions of future performance.

I was down in Vancouver a few weeks ago and had the chance to sit down and chat with Tye Bousada from EdgePoint. He highlighted the following:

“Despite the S&P 500 trading near record highs, market participation has become increasingly narrow.” He noted that: “76% of S&P 500 companies are trading at least 10% below their 52-week highs, while 39% are down more than 20%. If history is a guide, these periods tend not to end well for the crowd.”

When 75% of the companies in an index – in this case, the S&P 500 – are down, and yet the index keeps going up, I would tell you we have no breadth. Much of the market's recent leadership has been concentrated in companies tied to the AI theme.

History has shown that periods of elevated market concentration can create both opportunities and risks for investors. While today's environment differs from past market cycles, concentration risk remains an important consideration when evaluating portfolio diversification.

Les Consenheim is a portfolio manager with Raymond James Ltd -Consenheim Wealth Management and can be reached at 372-8117 or les.consenheim@raymondjames.ca Raymond James Ltd. is a member CIPF.

“This article is for general information purposes only. Individuals should seek professional advice prior to acting on any information referred to herein. “