Observations

A New Era Bear without an S&P correction, low New vs. Old Era correlation, nobody worries about a recession anymore, Hawkish Fedspreak, Gold prices to fall more, R1000 Growth underperforming & more.

Just a few random observations on a variety of topics.

1. A New Era Bear without an S&P Correction?

Recent action in the stock market has me pondering whether the S&P 500 New Era components (i.e., the technology & communications services sectors comprising about 46% of the overall index) could suffer a bear market without the overall S&P 500 index even experiencing a correction. Probably doubtful, but possible.

Chart 1 overlays the S&P 500 New Era and Old Era stock price indexes since year-end. From year-end to April 16^th, the correlation between these two components of the S&P 500 index was a reasonably strong 0.6. But since April 17^th, this correlation has declined to just 0.17. As highlighted on the chart, beginning on April 17^th, the S&P 500 New Era index surged by almost 27% to its peak on June 2cd. During this same time period, the S&P 500 Old Era index actually declined by about 2%. Then from the June 2 high until last Wednesday’s close after the FOMC meeting, S&P 500 New Era stocks collapsed by 15.1% while Old Era stocks rose by 4.3%! Recently, the New & Old Era segments of the overall S&P 500 Index have acted as though they are completely different species. They have become totally disjointed! Since April 17^th, most of the time when New Era stocks rise, Old Era stocks decline and vice versa. During the last almost four months, it’s as though the New & Old Era segments of the stock market need a whole new classification – investor choices are now cash, commodities, currencies, bonds, New Era stocks, or Old Era stocks.

If this new stock market classification persists, then perhaps it’s possible – unlike during the dotcom era – that the stock market could suffer a New Era bear market without the S&P 500 experiencing even a correction. Indeed, at the July 29^th low last Wednesday, the S&P 500 New Era Index had already suffered a severe correction, declining by more than 15%. Nonetheless, the remaining parts of the S&P 500 Index (the Old Era segment) had actually risen by more than 4% during the same period! Who needs “cash” in this odd turbulent stock market? If investors are looking to protect against a bear market, the best approach may just be to overweight the “OLD” Era!