From a distance, the S&P 500 looks healthy. The benchmark SPDR S&P 500 ETF Trust (NYSEARCA:SPY) gained 14.17% year to date through the Oct. 9 close and 16% over the past year. Markets were closed for the weekend, so those are still the latest figures. Volatility looks low too.
The VIX, Wall Street’s “fear gauge,” closed at 15.41 on Oct. 8, which is inside its normal range. In a recent Fox Business interview, Liz Ann Sonders spoke. The chief investment strategist at the Schwab Center for Financial Research said this low surface hides real weakness underneath.
Breadth Numbers Sonders Says Most Investors Miss
Market breadth tracks how many stocks are actually taking part in a rally. Sonders said less than half of S&P 500 stocks are trading above their 200-day moving average. That average is a stock’s mean closing price over its last 200 trading sessions, and traders often treat a stock trading below it as a rough sign of a downtrend.
Sonders also said only about 20% of index stocks beat the index itself over the past month. When only a minority of members beat the average, a small group is carrying the average. The annual figure is starker: according to the Fox Business segment summarizing Sonders, about 10% of S&P 500 stocks beat the index over the past year.
Her most unusual claim concerns beta, which measures how closely a stock moves with the market. Sonders said a record share of S&P 500 stocks now has a negative beta, meaning they move opposite to the index from day to day. Sonders described this as a record share. She did not say it was a majority. The measure shows how fragmented trading has become, and it gives no signal about where the index goes next.
Other observers have raised the same issue. On September 28, Jim Cramer said breadth was the narrowest “since, yes, the blow up of the dot-com period.”
What Narrow Leadership Means for Index Fund Holders
If a small group of very large companies produces most of the index’s gain, anyone who owns the index owns that concentration, whether they meant to or not. This is called concentration risk: the fund’s results depend on fewer outcomes. A disappointment at a handful of companies can matter more than broad strength everywhere else.
Why the Stock-Bond Cushion Has Shifted
A 60/40 portfolio puts about 60% in stocks and 40% in bonds, on the expectation that bonds will hold up when stocks fall, and Sonders said that premise depended on stocks and bonds tending to move in opposite directions. In her view, that relationship has changed because bond yields are now driven mainly by inflation rather than by economic growth. When inflation is the driver, stocks and bonds can fall together, and the bond side stops working as a cushion.
The stock-bond correlation has shifted. Sonders said it has moved away from the Great Moderation pattern and now looks more like the stretch from the late 1960s to late 1990s. The segment did not include her full explanation of that comparison.
Sonders’ Case for Staying Up in Quality
Sonders said investors want to stay “up in quality” in both stocks and bonds. In bonds, she favors investment-grade corporate debt over high-yield, and investment-grade bonds come from issuers that rating agencies consider likely to repay. High-yield bonds pay more because default risk is higher. In stocks, she pointed to balance sheet quality, which in practice means low debt and enough earnings to cover interest costs comfortably. This is Sonders’ view, reported here without approval. She has also spoken about market rotation in a July interview with CNBC.
Limits of What Breadth Can Tell You
Breadth measures describe what has already happened. They do not forecast what comes next, and narrow leadership has lasted for long stretches before without ending in a decline. Sonders described current conditions. Nothing in the segment forecast a drawdown or gave a timeframe. Some of the supporting figures in the segment came without her full reasoning.
What Balanced Portfolio Holders Should Watch
Her comments raise a practical question. For anyone holding index funds alongside bonds, is the diversification you think you have, across index funds and across stocks and bonds, the diversification you actually hold?