Personal Wealth Management / Expert Commentary
Fisher Investments Reviews What Market Breadth Says (Or Doesn’t say) About Stocks
Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer Ken Fisher discusses what “market breadth”—the percentage of stocks leading the market as stocks rise or fall—tells you about the outlook. While some investors believe higher market breadth is healthier for rising markets, Ken says there’s no statistical basis for that conclusion. Ken acknowledges market breadth has recently narrowed—and, like all trends, will eventually reverse—but he doesn’t think that portends a weaker market ahead.
According to Ken, slower growth economies—as seen in 2023—typically favor large, high-quality, growth-oriented stocks. Because there are only a handful of such stocks, it was natural for breadth to narrow. If slow economic growth persists in 2024, Ken thinks growth-oriented stocks will continue to outperform. However, if global economic growth reaccelerates, he says value stocks could lead as market breadth broadens.
So another question that I'm asked because 2023 was so much led by big —very big—growth and most particularly the infamous so-called "Magnificent Seven" that leads to the concept that leadership in the market has narrowed —which is often referred to as decreasing breadth in the market (let me come back to that)—and what does that say about the future?
So breadth is a phrase in market jargon that refers to what percentage of the stocks lead the market up when the market's going up. And it's traditionally thought, although not necessarily true, that it's healthier for the market moving forward if a greater percentage of the stocks are going up and leading the market when the market's rising. Whereas if it's just a few of the biggies, that's deemed as narrow breadth and thought to be an indicator of a poor market ahead.
When I say thought to be, it's thought to be but I'm going to tell you there's no statistical basis for that whatsoever in any kind of history that you can truly measure. Yes, it is true that when markets are getting more and more narrow and led by fewer and fewer stocks, they keep doing that until they stop. Which is true of almost every trend, that the trend keeps going until it stops. But there is nothing about narrowing to a given level that has a predictive future stock impact.
So let me go back to the way you might think about that more fundamentally, which is to think about the fundamentals. What was it fundamentally that was driving those fewer and fewer stocks to continue doing better than the market? And is that thing going to continue over the next 3 to 30 months? And if it will, market breadth will keep getting narrower and narrower and narrower and narrower. And the people who think market breadth narrowing predicts bad markets will keep getting more and more freaked out. They'll keep getting more and more wrong. Until the fundamentals change and go against that kind of stock. Those few stocks.
What I would say about the period, and particularly in 2023 I said this over and over again, the narrowing of breadth in 2023 which followed a broadening of breadth in 2022 as the market went down— which followed a narrowing of breadth in 2018, 19, 20 and 21 as the market was going up— that the 2023 narrowing was particularly because people expected a bad economy. We had a very, very low growth economy domestically and globally. And the companies that could truly shine in that environment, meaning grow well in a non-growth environment, stood out like a sore thumb and therefore were rare and doubly valuable because of it.
If you have that same environment in 2024, that'll continue. If instead you get to a world in 2024, as my January 1st New York Post column hypothecated, that likely turns to a value world later in the year, the first part of the year would see that trend continuing of narrowing, and when you shift it to value later in the year, you'd see the broadening. Will my forecast of that be right? That a debatable issue because you always know you can be wrong. But the fact of the matter is, if you move away from that low growth environment where those few like the "Magnificent Seven" stand out so much —like bright, shiny stars that pierce through a fog— into an other world where the perception becomes GDP growth will accelerate so economically sensitive stocks like industrials could grow more. Then you'd see that breadth broadening. It wouldn't necessarily be bad for the market.
What really becomes bad for the market is if you actually move into a recessionary world that takes down all stocks in a narrow breadth world because it impinges on those economically sensitive ones, which is a bigger number of them.
Thank you so much for listening to me today. I appreciate it. I hope it was useful for you.
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