After a sluggish start to 2024, the major stock indexes resumed moving upward. By Jan. 19, the S&P 500 and Dow Jones Industrial Average established new record highs. The S&P 500 continued to gain in five of the next six trading sessions. But the broad stock market isn’t doing as well as the major indexes and it won’t take a big disappointment or surprise to cause investors to move some money out of stocks, writes Bob Carlson, editor of Retirement Watch.
The technology sector is moving higher and bringing the indexes with it. But it is the only sector doing well. The other 10 sectors in the S&P 500 are an average of about 15% below their all-time highs, and none of the non-tech sectors established a new record in January.
A few large company stocks outside the tech sector also are doing well, but it is the tech sector that accounts for most of the gains in the indexes. The S&P 500 is capitalization-weighted, giving the companies with the largest capitalizations greater weight in the index than other stocks.
To show the imbalance in returns across the market, a version of the S&P 500 that gives equal weight to each stock has a negative 0.3% return so far in 2024. A small-company stock index, the Russell 2000, is about 20% below its all-time high set in November 2021.
As in the days leading up to the tech stock bubble in 2000, a few big stocks in one sector of the market are moving the indexes higher. Relatively small declines in those few stocks would cause a significant decline in the market indexes, unless the other stocks rose at the same time.
That said, the narrow foundation of the recent record highs doesn’t guarantee that the indexes are setting up for a decline similar to the one that began in 2000. The “Magnificent Seven” stocks have done well for investors. Those seven stocks might continue doing well as long as investors are confident enough to keep their money in popular index funds.
But investors need to be careful. Many popular technical indicators are in neutral or negative territory, though some remain positive. And money market funds still yield 5% with little or no risk, providing competition for stocks.
There’s a lot of optimism that interest rate cuts by the Fed are imminent and that inflation has been tamed without a recession. Stocks are also trading at high valuations.
