Not Just Coronavirus Winners

As the S&P 500 hit breakeven for the year last week, nearing its February peak, we heard—and still hear—a common refrain: The rally isn’t real since most US stocks remain negative on the year. Without mass participation, it is a mirage in which only Tech and coronavirus winners are up. One analysis in The Wall Street Journal, which centered on the Wilshire 5000 (an index including every publicly traded US company), observed that 73% of companies still had negative year-to-date returns as June dawned. Many other studies have made similar observations, using year-to-date data. Just one problem: Looking only at year-to-date returns invites skew from companies that underperformed at the end of the last bull market or got hammered hard in the bear. If you look only at the rally since March 23, it becomes clear participation is quite broad—a typical trait of new bull markets.

For our analysis, we used constituent data from the MSCI USA Investable Market Index—not as broad as the Wilshire, but it still covers 99% of total US market capitalization. As of Wednesday’s close, 2,274 of the index’s 2,346 constituents that have traded since March 23 are up.^[i] That, to spare you the math, is 96.9% of American companies. A little more than half are beating the index’s 41.2% return over this span—in other words, it isn’t like Tech and coronavirus winners are up gangbusters while everyone else is up 1%.^[ii]

The sector breakdown is also largely consistent with what we would expect to see in an actual recovery. Positivity is fairly uniform, with Consumer Staples having the low share of positive constituents (92.3%) and Tech the most (99.4%).^[iii] But the traditionally defensive sectors, for the most part, have fewer outperformers than the others. Only 13.6% of Utilities companies and 27.2% of Consumer Staples firms are beating the index—the latter countering the popular notion of long lines at grocery stores creating many stock market winners.^[iv] That narrative, widely known by the time the recovery began, likely ran out of steam some time ago. Elsewhere, it may seem surprising that only 42.2% of Communication Services companies are outperforming, given that sector is home to some Tech-like companies in its Internet Media industry.^[v] But Communication Services also includes Telecom, which is traditionally defensive like Utilities. Meanwhile, Energy has the greatest concentration of outperformers, with 80.9% ahead of the index, a logical outcome of Energy stocks getting whacked hard as oil prices plunged earlier in the year.

In our view, latching onto year-to-date constituent returns—while ignoring returns since the low—in order to rationalize doubts in the rally is just one more example of what we call the Pessimism of Disbelief. This mentality reigns supreme as a recovery takes hold, and it lasts for a while. People seek any and all evidence, no matter how far-fetched, that the rally is fake. They dwell on bad news. Good news gets overlooked or cast in a negative light. But when you assess what markets have done lately without that bias, it starts looking more and more like a new bull market.