The Market Behavior Beneath the Record Recovery That Deserves Investors’ Attention

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Published on October 28, 2020

| 4 min read

David Schofield, President, International Division


Video Commentary SidebarEquity markets are, of course, forward-looking by nature, principally concerned with future earnings. Naturally, as the world attempts to climb out of the economic carnage wrought by an ongoing global pandemic, optimism for a nearing return to normalcy has pushed stocks well ahead of most traditional economic indicators significantly. While investors likely welcome the swift bounce back in their account values, we believe their dramatic recovery is accompanied by concerning market trends. In this blog, we’ll examine where we find historical extremes within equities: narrow leadership, top-heavy concentration, and investor groupthink.

Despite a 10% bump in the road for U.S. markets in September, all major stock market indexes nonetheless posted positive returns for the entire quarter, ranging from 13% for U.S. growth stocks to 2.5% for U.S. small cap value. This continued strength allowed many markets to recover fully from the drawdown experienced in the first quarter, and in some cases, to move into positive territory for the year.


f1 - YTD drawdown


In fact, this has been the fastest recovery from a bear market in history. Using the S&P 500 as a proxy, the market lost a third of its value in just 24 days, but took only a further 107 days to recover.


f2 - Shortest drawdown


As we have noted in previous commentaries, the biggest U.S. growth stocks have led this recovery. Stunningly, Apple has actually more than doubled its market cap from its low point in March – and despite a brief reversal in early September, growth stocks have extended their dominance over value stocks to the tune of 36% year-to-date.


f3 - YTD returns


The well-known culprits in the technology sector have led this bounce, resulting in an unusually massive dispersion between the best- and worst-performing sectors and a big change in the weights of certain sectors over the last year. Technology is now almost 30% of the S&P 500, and energy has fallen to as little as 2%.


f4 - Sector weights over time


Of course, we know that this multi-year trend of large outperforming small, and growth outperforming value, is highly likely to mean-revert at some point. Exactly when is the subject of much speculation amongst market commentators.

We have no forecast at Intech as to when this might occur, but we can point you to some growing signs of stress becoming apparent in our Intech Equity Market Stress Monitor®, which can be a precursor to significant volatility events.

The level of capital concentration in U.S. markets is now close to levels seen at the height of the tech bubble in the late ‘90s, and this phenomenon extends even to global indexes due to their high proportion of U.S. companies. This is a significant indicator of stress in these markets.


f5 - Capital concentration


Although markets outside the U.S. have not experienced the same degree of capital concentration in the largest names, this does not mean they are free of stress symptoms. An increase in correlations between stock returns is an indication of increasing systematic risk in a market. It is notable that this measure has been increasing in all major equity markets, developed and emerging, to be at, or close to, all-time highs.


f6 - Correlation of returns

With a highly polarized U.S. election less than a month away, we would continue to advocate seeking downside protection through defensive approaches to equity investing, and to stress the importance of diversifying and rebalancing your sources of risk as circumstances permit.

Explore the Monitor

We’ve identified a couple of notable trends here, but there’s far more to dig into. Compare the state of today’s markets with decades of history in our interactive Intech Equity Market Stress Monitor®, which offers five market risk indicators and 21 global and regional equity benchmarks to explore.


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