The S&P 500 reached a new high, which has made the headlines. However, what is not reaching a new high may be the most interesting news.

On April 26th, the S&P 500 closed above the prior all-time high set on September 21st of last year. While that is noteworthy in terms of history, it also means that the S&P 500 has returned essentially 0% over that time frame. Since the prior high on January 26, 2018, the S&P 500 is only up 4.9% on a total return basis and 3.9% on an annualized basis. In comparison, the Aggregate Bond Index is up 3.85% on a total return basis and 3.08% annualized, while Short-Term Treasuries are up 2.87% on a total return basis and 2.29% annualized over the same period.

Source: FactSet.

While the S&P 500 index has reached a new high, this does not mean all components are at a new high. At an Industry level, the only areas that are above where they stood on September 21, 2018 are Technology, Consumer Discretionary, Communication Services, Utilities, and Real Estate.

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When evaluating the stocks and subindustries contributing to the new highs of the Technology, Consumer Discretionary, and Communication Services industries, it seems that investors are favoring companies that have secular growth potential and are not as dependent on strong economic growth to grow their earnings. Real Estate and Utilities are typically lower volatility and steady performing industries. Based on this industry leadership mix, we would characterize the current environment as investors favoring growth and stability. The areas that are notably not above their January or September 2018 levels are those that are traditionally more cyclical industries including Financials, Industrials, Materials, and Energy.

Not surprisingly, the relative strength trends of these industries have been negative since January 2018. Small caps have also been underperforming recently. There has also been a lack of global confirmation as the percentage of markets in the MSCI All Country World Index (ACWI) with rising 200-day moving averages is still low.

Source: FactSet.

We looked at some prior periods when the S&P 500 has moved back to recent highs, the 2012-2014 period when the S&P 50 first broke above the 2007 high and the 2016-2018 period when the S&P reached a new high in January 2018. Cyclical industries tend to have upward trending relative strength charts. Small caps also tend to outperform for most of those periods as well. There is also some confirmation from global markets as most equity markets in ACWI tend to have rising 200-day moving averages.

Source: FactSet.

Their lack of strength and confirmation of the new highs for the S&P 500 may be a sign that investors remain doubtful of the global economy’s near-term growth prospects. The credit markets are sending a similar message as HY-rated markets have not returned to a new high vs. Treasuries, and CCC-rated credits have not returned to new highs versus BB and B-rated credits.

These divergences suggest that selective risk taking and an overall lower risk posture in portfolios is warranted.

The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.

Rank Dawson, CFA, FDP

Senior Vice President, Investment Strategy
Boyd Watterson Asset Management, LLC