In a warning sign that the latest bull rally may be losing steam, the weekly count of S&P 500 stocks hitting 52-week highs has plunged by nearly two-thirds since mid-June, from 293 to 106, per data from FactSet Research Systems. This indicates a disturbing drop in market breadth after the S&P 500 reached new record highs in the summer.

“Investors are concerned that this is another breakout that won’t last,” said Frank Cappelleri, executive director at equity trading and institutional brokerage firm Instinet, a subsidiary of Nomura, in a detailed story in The Wall Street Journal. “Violent back-and-forth stock moves shake investor confidence, which causes doubt for the next breakout to work,” he added.

Key Takeaways

  • Stock market breadth is declining.
  • Sharply fewer stocks are making 52-week highs.
  • Investor confidence is slipping.
  • Recessionary fears are rising.

Significance For Investors

Since early 2018, the S&P 500 has reached new all-time highs three times, but each rally was short-lived. By contrast, in 2013 and 2017 stocks kept advancing after setting new highs following strong upticks in volatility. From a new all-time high on July 26, 2019, the S&P 500 fell by 6.8% through Aug. 5, based on intraday prices. As of the open on Sept. 30, the index was 2.0% below that July record.

Bruce Bittles, chief investment strategist at Robert W. Baird & Co., says that a key cause of the market's sluggishness is that interest rate cuts by the Federal Reserve are losing their potency. “The stock market has grown dependent on low interest rates, but rates that continue to decline suggest that the global economy and perhaps the U.S. economy is losing some traction,” he told the Journal. “With the Fed and other central banks running out of bullets, it’s less support for the market and that could be another headwind for stocks to overcome," he added.

Indeed, U.S. economic data have offered mixed signals lately. The housing market and consumer spending look strong, but manufacturing activity, job growth, and consumer confidence have weakened. Chief financial officers (CFOs) at large U.S. companies are increasingly downbeat, with 67% expecting the U.S. economy to be in recession by the end of 2020, a Duke University survey reveals.

The latest weekly investment sentiment survey from the American Association of Individual Investors (AAII) shows increased pessimism: 33.3% of respondents expect stock prices to fall over the next 6 months, while only 29.4% expect them to rise. The historic averages, by comparison, are 38.0% bullish and 30.5% bearish.

High income investors recently surveyed by Wilmington Trust, a division of M&T Bank, say that protecting assets is more important now than finding opportunities for growth, Barron's reports. Among those with annual incomes of $225,000 or more, 61% feel this way, while 76% of those earning at least $500,000 express the same opinion.

Looking Ahead

A breakdown in momentum stocks points to increased odds of a recession and a declining stock market, Morgan Stanley warns. Goldman Sachs cautions in a recent edition of their US Weekly Kickstart report, "The macro environment continues to be defined by uncertainty."

Nonetheless, some market watchers believe that an extended pause in the upward trajectory of stock prices is a positive development. “Historically, markets that have gone nowhere like the S&P 500 has the last 18 months have typically resolved with a big upside move,” said Thomas Lee, managing partner and head of research at Fundstrat Global Advisors, per the Journal.