Lots of Relatively Cheap Stocks!

The degree of relative PE cheapness among the 72 S&P industry indexes comprising the S&P 500 Index is a decent gauge of future broadening in stock market performance.

Participation in the contemporary bull market has been abnormally narrow, concentrated primarily among a small cadre of large-cap, new-era stocks. Consequently, the S&P 500 index has proved to be a very venerable and difficult bogey for most equity investors. Will the S&P 500 continue dominating the U.S. stock market or will new leadership finally emerge yet in this bull market bringing broader participation?

In recent missives, I have argued that an unusual contractionary monetary policy during most of this bull market – a stubbornly high Federal funds rate, a chronically inverted yield curve, and weak monetary growth – has primarily been responsible for persistently weak stock market breadth. Nonetheless, I suspect recent weakness in overall real economic growth and a general lack of inflationary evidence despite the Trump tariffs will soon force the Fed to again ease monetary policy and help broaden stock market participation. But another positive force may also help improve stock market breadth.

Despite this bull market nearing its fourth birthday, because so many stocks have been left behind, the stock market still boasts lots of relatively cheap stocks. Indeed, the percentage of S&P 500 industry sectors which currently trade at a relative price-earnings (PE) multiple which is below historical averages is near a record high dating back to 1990. And when so many industries comprising the overall S&P 500 index remain relatively cheap, participation has tended to broaden with both small cap stocks and the equal-weighted S&P 500 index outpacing.