More Cautionary Tales

Some other concerning stock market signals to monitor

The S&P 500 Index has been trending sideways for the last couple months near all-time record highs as caution signs continue to multiply. What follows are a few more cautionary tales which have drawn my attention.

1. S&P 500 Defensiveness Near Record Low

The defensive composition of the S&P 500 index has seldom been lower than it is today. Chart 1 shows the percent of the S&P 500’s overall market capitalization accounted for by its defensive sectors which include the utilities, real estate, consumer discretionary, and health care sectors. In the early-1990s and again at the bottom of the 2009 bear market, S&P defensiveness reached almost 36%. Conversely, defensive stocks comprise only about 17% of the stock market currently – almost one-half lower compared to peak levels since 1990.

Since 1990, when defensiveness has significantly diminished, bear markets or corrections have often occurred. For example, defensiveness declined to almost 24% in late-2007 before the 2008-09 bear market, it fell to 26% before a correction in late-2018, it was only 23% before the 2022 bear market, and of course it reached almost 16% before the dotcom collapse in 2000. While defensive stocks comprising only 17% of today’s market capitalization does not ensure a bear market, it does increase the likelihood of a correction and implies above average volatility looking forward.