The S&P 500 has gained more than 20% from its October 2022 low and entered a new bull market. The tech-heavy Nasdaq Composite is up more than 27%. And the Nasdaq 100 is up a whopping 35% over the same time frame.
You would think that investors would be positively giddy about this turn in the market, but they aren't. AAII reports that their bull-bear survey is skewing bearish. Institutional cash levels are higher than the long term average, and hedge funds are carrying larger than normal short positions. In other words, investors don't seem to be convinced that this rally will hold up.
There are some formidable challenges ahead, and reluctant investors can be forgiven for doubting the durability of this nascent bull market. The Fed could overplay its hand and tighten us into a recession. The banking mess could spiral out of control, leading to a serious credit crunch. The rosy employment situation could take a turn for the worse. Some of the high-flying tech companies could stumble at the next round of earnings announcements.
Of all the things that worry investors today, I think the narrow leadership is the most problematic. Roughly 80% of the gains we've made since last October can be traced to just seven companies. The table below shows these leading stocks.
These seven mega-cap stocks are up by an average of 69.4% since the bull run began on October 12, 2022. If these stocks stumble or begin to lose favor with investors, the market could take a serious hit. There are some signs that this rally is beginning to widen out, as evidenced by the rebound in small caps and value stocks for example. If participation in the rally continues to broaden out, the market could continue to rise without depending so much on just these seven names.
ETFs that are beating the S&P 500
In an effort to better understand which areas of the market are leading the charge, I scoured the ETF universe and found 19 that are up more than the S&P 500. Many of these market segments are technology based but some are not. The table below shows the 20 best performing ETFs, including the S&P itself (SPY). They are ranked in order of highest to lowest price increase since the market bottom in October.
Why are semiconductor stocks so hot right now?
The hottest segment of the market is semiconductors. Part of the attraction is their dismal performance last year. This year's top ETF was down 33% in 2022. Since the October low, it has gained 67%. The largest holding for this ETF is Nvidia, which is up a staggering 237% from the October lows. This is bargain hunting on steroids.
Other reasons include things like increased demand: Semiconductors are crucial components in various industries, including technology, automotive, telecommunications, and consumer electronics. The growing demand for electronic devices, smartphones, electric vehicles, artificial intelligence, cloud computing, and other emerging technologies has driven the demand for semiconductors.
In addition, the semiconductor industry is known for its continuous innovation and technological advancements. Companies that can offer cutting-edge solutions, such as advanced microprocessors, memory chips, and specialized semiconductors, are likely to attract investor interest and perform well in the market.
Then there's the added boost from government support and investments: Governments worldwide recognize the strategic importance of the semiconductor industry and have developed various initiatives to promote its growth. For example, governments may provide subsidies, tax incentives, or research funding to domestic semiconductor companies, leading to increased investor confidence and market interest.
Semiconductors are also expected to play a crucial role in future technologies like 5G networks, the metaverse, Internet of Things (IoT), autonomous vehicles, and artificial intelligence. The potential for these technologies to transform industries and societies has attracted significant investor attention to semiconductor stocks.
Why are AI and Robotics stocks so hot?
The second hottest segment of the market is Artificial Intelligence (AI) and Robotics. This group is up 57% since October. These companies are heavy users of leading edge chips. AI and robotics have gained significant attention and popularity in recent years due to several key factors:
Technological Advancements: Advances in computing power, algorithms, and data availability have fueled the development of AI and robotics. These technologies are becoming more capable, efficient, and accessible, enabling the creation of intelligent machines with a wide range of applications.
Increasing Automation: Automation has become a major driver of productivity and efficiency in various industries. AI and robotics offer the potential to automate repetitive or complex tasks, leading to cost reduction, improved accuracy, and enhanced productivity. Many organizations are exploring these technologies to streamline their operations and gain a competitive edge.
Digital Transformation: The ongoing digital transformation across industries has created a need for AI and robotics solutions. Businesses are looking for innovative ways to leverage technology to optimize processes, enhance customer experiences, and create new revenue streams. AI and robotics play a crucial role in this transformation, enabling companies to harness the power of data, make data-driven decisions, and automate various tasks.
Breakthrough Applications: AI and robotics have demonstrated their potential in a wide range of applications, capturing the imagination of the public and businesses alike. From self-driving cars and voice assistants to medical diagnostics and industrial automation, these technologies have the capacity to revolutionize entire industries and improve people's lives.
Investment and Funding: The growing interest in AI and robotics has attracted significant investment and funding from both public and private sectors. Governments, research institutions, and corporations are investing heavily in research and development, leading to accelerated progress and the emergence of innovative solutions. This increased funding has further fueled the excitement and momentum around these technologies.
Media Attention and Popular Culture: AI and robotics have been prominently featured in popular culture, including movies, TV shows, and books. This exposure has helped generate public interest and curiosity about the possibilities and implications of these technologies. Media coverage often focuses on the potential benefits and risks associated with AI and robotics, contributing to the current "hot" status.
Why are home builders so hot right now?
Home builders are experiencing increased demand and popularity for several reasons:
Housing Market Boom: In many regions, there has been a significant surge in the housing market. Moderate mortgage interest rates and increased affordability have motivated people to purchase homes or invest in real estate. This increased demand for housing has created opportunities for home builders to meet the market needs.
Limited Housing Inventory: The supply of existing homes on the market is often not sufficient to meet the demand. Many potential buyers find it challenging to find suitable homes due to limited inventory. As a result, they turn to new construction, leading to increased demand for home builders.
Customization and Modern Features: Homebuyers often desire personalized homes with specific features and layouts that suit their needs and preferences. New home construction allows buyers to customize their homes from the ground up, incorporating the latest design trends, energy-efficient features, and smart home technologies. Home builders can fulfill these demands by offering customizable options and incorporating modern amenities.
Relocation and Remote Work: The COVID-19 pandemic accelerated remote work and led to a shift in people's living preferences. With more flexibility to work from anywhere, individuals and families are increasingly relocating to areas that offer a better quality of life, more space, and affordability. Home builders are capitalizing on this trend by constructing new homes in desirable locations to cater to the influx of new residents.
Why are gold miners hot?
Gold miners are hot because gold and silver prices are hot. At $1,965 an ounce, gold has about 5% to rise to hit its record high of $2,069, set back in 2020. Gold miners tend to track the price of gold, and they usually gain more than the metal in a bull market. That's because it doesn't cost more to mine an ounce of gold whether it's $1,000 or $2,000 per ounce. Most of the increase in the price of gold goes directly to the bottom line of the miners.
There are three main drivers of the gold price. First, since gold is priced in dollars, it is worth more when the dollar is weak. Second, gold is sensitive to bond yields. After yields spiked during the Fed's rate hiking program, they are beginning to come down now. With inflation headed lower, there is less pressure on the Fed to continue raising rates. Investors are anticipating an end to the rate hike cycle and a pivot to lower rates by the end of this year. And lower rates are good for gold and the miners.
The third driver of gold prices is its role as a safe haven when economic conditions are deteriorating or geopolitical tensions are high. With the threat of a recession looming, the ongoing war in Ukraine, and the problems in the banking system, the demand for gold as a place of shelter has grown this year.
Final thoughts
In the interest of brevity, I won't go into the details of all 19 market segments that are outperforming the S&P 500. What this exercise has taught me is that the bull market leadership is not as narrow as it first appears. To be sure, the mega-cap tech companies are leading the charge but there are other, non-tech segments that are also doing well.
Home builders, copper and gold miners, Bitcoin, infrastructure, and oil & gas equipment suppliers are all doing very well. With inflation coming down, a possible Fed pause on rate hikes, a debt ceiling agreement, a robust jobs market, healthy consumer spending, and an economy that has slowed but is still expanding, perhaps investors will begin to warm up to the idea that this really is a bull market, and not just a rally in an ongoing bear market.
this is the best memo you have sent out in the two years following your work. Congratulations!
Very informative Erik! Enjoyed all the analysis and final comments.