It’s a bearish sign that so many advisers are declaring that we’re now in a “stock picker’s market.”
That’s because fewer and fewer stocks participate in a bull market as it approaches its top. Advisers therefore find it increasingly difficult to identify stocks that will keep up with the market, much less beat it.
By telling their clients this is a “stock picker’s market,” these advisers think they are distinguishing the investment environment from other periods in which the majority of stocks participate in the market’s major trend. Little do they appreciate that, in effect, they are also declaring the bull market to be getting extremely long in the tooth.
That’s because the degree to which stocks move together in unison is a function of the market cycle. In bear markets the vast majority of stocks do so, whereas in bull markets stocks tend to march to the beat of their own drummer. It’s at market tops, therefore, when stocks’ moves in step with the overall market tend to be at the lowest point.
Such as it is now. Last week, even as the broad market averages rose to within shouting distance of their all-time highs and some secondary averages actually did so, just 7.2% of stocks on the New York Stock Exchange hit new 52-week highs. A slightly greater percentage of stocks — 7.3% — hit new 52-week lows.
To illustrate the extent to which virtually all stocks suffer during market declines, in contrast, take October 2008. That was the single-worst month of the 2008-2009 bear market, when the Wilshire 5000 Index dropped 17.6%.
International stocks, which advisers often recommend as portfolio diversifiers, failed to provide any protection, with the MSCI EAFE Index tumbling 20.2%. Even traditional hedges such as gold failed to provide significant insurance: The London Gold Bullion price fell 17.4% in October 2008.
In contrast to the situation that prevailed in 2008, there’s been a significant divergence recently between the returns of these three asset classes.
In true contrarian fashion, the majority of advisers not only fail to appreciate this pattern, they get it precisely wrong. At the bottom of bear markets, after finally “discovering” that stock picking doesn’t provide much protection against a huge drop in the overall market, they declare that it’s a “stock market” rather than a “market of stocks.” Of course, that’s just when they should be redoubling their efforts at stock picking.
Just the reverse situation applies at market tops: After belatedly realizing that stocks are not necessarily moving up and down in lockstep with the overall market, they declare it to be a “market of stocks” rather than a “stock market.” That’s just when they should be focusing on the risks to all equity positions that a major bear market would represent.
Keep this in mind the next time your adviser announces that we’re now in a “market of stocks.” You may want to use this occasion to switch to a more contrarian-oriented adviser who can better protect you in a bear market.
Written by Mark Hulbert of MarketWatch