Current stock market dynamics are beginning to resemble 2021, a year that led up to the most recent bear market correction, according to Charles Schwab.
In its latest commentary, the firm addressed the increasing misalignment between index-level and individual stock performance. This divergence has intensified and poses a risk worth monitoring, wrote CIO Liz Ann Sonders.
"If we continue to see more weakness in the former and strength in the latter, it will start to eerily mimic 2021's dynamic," she noted.
While the S&P 500 has achieved record highs throughout the year, the percentage of individual stocks trading above their 50-day moving average has declined, she observed.
"That was the case in the second half of 2021 which, with the benefit of hindsight, correctly signaled that the market would no longer be able to hold up at the index level—thus leading to the bear market in 2022," Ann Sonders stated.
The benchmark index fell around 25% that year before the recovery began in 2023.
While the S&P 500's steepest drop this year has been about 5%, the average individual stock in the index has declined as much as 15%. This trend is even more pronounced for the Nasdaq, where the median decline of single names is 38%, Schwab reported.
As of last Friday, less than 10% of stocks listed on the S&P and Nasdaq hit new 52-week highs. Concurrently, the number of individual names reaching fresh lows is at bear market levels, the note highlighted.
This index-level bull run can be attributed to a concentration in a narrow field of stocks, with AI beneficiaries leading the charge. However, Ann Sonders pointed out that these aren't necessarily the biggest stocks, despite the heavy focus often given to top tech mega-caps.
"It also may surprise some that three of the top-10 best performers this year are not in the Technology sector, but instead in the Utilities sector," she wrote. "Credit the second-order beneficiaries of the artificial intelligence (AI) boom, as well as the build-out of the country's energy grid. The list has also gone 'old school' with General Electric…go figure!"
