The stock market is showing signs that a bear market could be on the horizon, according to Charles Schwab. Market dynamics are starting to resemble those of 2021, a year that preceded a bear market correction. Charles Schwab’s Chief Investment Officer, Liz Ann Sonders, highlighted the growing divergence between index-level and individual stock performance as a cause for concern.
While the S&P 500 has been hitting record highs, the percentage of individual stocks trading above their 50-day moving average has been decreasing. This trend was also seen in 2021, which ultimately led to a bear market in 2022. Despite the S&P 500 only experiencing a 5% drop this year, individual stocks within the index have seen declines of up to 15%. The Nasdaq has been hit even harder, with the median decline of individual stocks reaching 38%.
Furthermore, less than 10% of stocks listed on the S&P and Nasdaq have hit new 52-week highs, while the number of individual stocks reaching new lows is at bear market levels. This discrepancy between index-level performance and individual stock performance is a red flag for investors.
The current bull run in the market is largely driven by a few select stocks, particularly those benefiting from artificial intelligence (AI). Surprisingly, some of the top performers this year are not in the technology sector but in utilities. This shift in performance highlights the importance of diversification in a portfolio.
As investors keep a close eye on market dynamics, it will be crucial to monitor the performance of individual stocks and their alignment with index-level trends. The potential for a bear market looms, and being prepared for any market downturn will be key for investors to navigate the volatility ahead.
