The history of bull and bear markets, plus the biggest stocks, buying the dip, and industrials
The Sandbox Daily (6.27.2023)
Welcome, Sandbox friends.
Today’s Daily discusses:
the history of bull and bear markets
the biggest stocks
investors are buying the dip
strength in industrials
We are loving our time with iCapital in San Diego, CA. Here we are having fun talking about market dynamics and educating advisors on how to best utilize structured products to meet client solutions in their business.
Let’s dig in.
Markets in review
EQUITIES: Nasdaq 100 +1.75% | Russell 2000 +1.46% | S&P 500 +1.15% | Dow +0.63%
FIXED INCOME: Barclays Agg Bond -0.19% | High Yield +0.34% | 2yr UST 4.674% | 10yr UST 3.772%
COMMODITIES: Brent Crude -2.20% to $72.55/barrel. Gold -0.54% to $1,923.3/oz.
BITCOIN: +1.52% to $30,644
US DOLLAR INDEX: -0.18% to 102.504
CBOE EQUITY PUT/CALL RATIO: 0.55
VIX: -3.58% to 13.74
Quote of the day
“Creative destruction — the evolutionary process by which new technologies and business methods displace older, less efficient ways of doing things.”
- Edward Chancellor, British financial historian and journalist
The history of bull and bear markets
Historically, S&P 500 bull markets have lasted about 3.5 times as long as bear markets.
Since 1928, the S&P 500 index's 27 bear markets have lasted an average of 286 days, while the average bull has lasted 1,011 days.
If the new bull market were to last as long as the average bull, it would extend out to July 19, 2025.
Don't fight history.
Source: Bespoke Investment Group
The biggest stocks
History shows that the largest companies tend to struggle once they grow into the largest market capitalizations.
As Nvidia Corp. (NVDA) recently cracked the $1 trillion market cap club on the back of the stock’s +178% year-to-date performance, many are left wondering what to expect going forward.
This chart shows the average annualized outperformance of stocks after they’ve become one of the largest top 10 in the S&P 500 index. As you can see, the top 10 largest companies underperform by an average of -1.5% over the subsequent 10 years.
In fact, when you look throughout history, it’s quite natural to see turnover in the largest companies as new stocks emerge and others fall. Here are the largest 10 U.S. stocks at the start of each decade.
Source: Dimensional Fund Advisors, Discipline Funds, Investment Moats
Investors are buying the dip
2023 is the 2nd strongest “buy the dip” year since 1930, only bested by 2020.
The chart below shows the S&P 500’s average return following down market days – sorted by year.
Investors are being rewarded to buy temporary weakness. This helps explain why the VIX index has been so muted; the market has avoided declines that are extending to the downside for any length of time.
Source: Michael McDonough
Strength in industrials
Industrial stocks are considered an excellent instrument to measure market health due to their strongest correlation to the major U.S. averages. When they perform well, so does the market.
This ratio chart shows the Equal Weight Industrials (RSPN) vs. Equal Weight S&P 500 (RSP) reaching new all-time highs.
After absolutely no progress for over a decade, the ratio is emerging from an extensive base, increasing the leadership role for industrial stocks.
As long as the ratio holds above the shelf of former highs, its likely to see continued outperformance from industrials. This scenario could bode well for a healthy market in the foreseeable future, especially as breadth has widened out over the last month.
Source: All Star Charts
That’s all for today.
Blake
Welcome to The Sandbox Daily, a daily curation of relevant research at the intersection of markets, economics, and lifestyle. We are committed to delivering high-quality and timely content to help investors make sense of capital markets.
Blake Millard is the Director of Investments at Sandbox Financial Partners, a Registered Investment Advisor. All opinions expressed here are solely his opinion and do not express or reflect the opinion of Sandbox Financial Partners. This Substack channel is for informational purposes only and should not be construed as investment advice. Clients of Sandbox Financial Partners may maintain positions in the markets, indexes, corporations, and/or securities discussed within The Sandbox Daily.