Investors aren’t happy, but stocks are up.

If you ever participated in a fantasy football league, you may have experienced a run on a position during your draft. One person picks a kicker or defense mid-round and, suddenly, almost everyone rushes to follow suit. A similar occurrence may be happening in the United States stock market.

While major U.S. stock indices are in positive territory year-to-date, market gains have been concentrated in just a few companies’ stocks. Al Root of Barron’s explained:

“Today’s five biggest stocks…have a combined market cap of about $8.7 trillion, almost 25% of the S&P 500 [capitalization (cap)] and about 3.2 times the $2.7 trillion Russell cap…What’s more, those top five stocks have returned an average of 50% in 2023, accounting for roughly 80% of the S&P 500’s 8% gain. The median stock in the index has gained less than 2%, and less than half are trading above their 200-day moving averages…The top five stocks are also expensive: They trade for an average of 31 times estimated 2024 earnings, while the index trades at 17.4 times earnings.”

The fact that five stocks have been driving market performance may be hurting investor sentiment, according to sources cited by Barron’s. Sentiment also has been affected by concerns about inflation, tightening credit conditions, the possibility of recession, and the chance the U.S. may default on its debt. Investor sentiment is the way investors feel about an asset or financial market. When investors are feeling pessimistic about stocks, stock markets tend to fall. Similarly, when investors are optimistic, stock markets tend to rise.

Bank of America’s latest survey found that sentiment among global asset managers is the most bearish it has been this year. Almost two-thirds of participants think economic growth will slow this year, although a similar number anticipate a soft landing for the global economy, reported Ksenia Galouchko of Bloomberg.

Last week, the Federal Reserve signaled the end of rate hikes was near, which pushed major U.S. stock indices higher. The indices gave back some gains on Friday after debt-ceiling talks faltered but finished the week higher overall.^ The yields on most maturities of U.S. Treasuries moved the week higher.

The list of items that have the potential to slow economic growth in the U.S. and/or the world is longer than anyone would like it to be.

Now, there’s a new item on the list: El Niño.

El Niño is a change in the normal wind and wave patterns of the Pacific Ocean that occurs every few years. The change can significantly alter weather across the nation, according to the National Oceanic and Atmospheric Administration. It also can have a significant influence on economic growth, according to new research published in the journal Science.

Dartmouth scientists Christopher Callahan and Justin Mankin wanted to investigate how climate variability affects economic growth. They decided to quantify the impact previous El Niños have had on the world’s gross domestic product (GDP), which is the value of all goods and services produced. Eric Roston of Bloomberg reported:

“The new analysis uses a model that combines economic growth and climate variability from 1960 to 2019 and compares GDP growth around the world before and after El Niño events. The output suggests a ‘persistent’ impact on countries’ economic growth, especially in Peru, where the dynamic was first discovered, and around the tropics. They found that a powerful episode in 1997 and 1998 set world GDP back $5.7 trillion and a 1982/1983 El Niño reduced growth by $4.1 trillion.”

Scientists at the U.S. Climate Prediction Center say there is a 90 percent chance that an El Niño weather pattern will occur later this year. It remains to be seen whether or how El Niño will alter economic growth.

As an investor, it can be difficult to think of economic slowdowns and recessions as normal parts of the economic cycle, especially when financial markets head lower. If you’re concerned about the future, please let us know. One of our most important roles is helping clients maintain a long-term perspective.

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Sources:

https://www.barrons.com/articles/the-5-stocks-that-rule-this-marketand-make-investors-nervous-be0668da

https://www.bloomberg.com/news/articles/2023-05-16/bofa-survey-shows-investors-most-pessimistic-so-far-this-year

https://corporatefinanceinstitute.com/resources/capital-markets/market-sentiment/

https://www.cnbc.com/2023/05/19/fed-chair-powell-says-rates-may-not-have-to-rise-as-much-as-expected-to-curb-inflation.html

https://finance.yahoo.com/news/republican-debt-ceiling-negotiators-walk-155516086.html 

https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value_month=202305

https://oceanservice.noaa.gov/facts/ninonina.html

https://www.science.org/doi/10.1126/science.adf2983

https://www.bloomberg.com/news/articles/2023-05-18/economic-losses-from-extreme-weather-is-severely-underestimated

https://www.goodreads.com/quotes/tag/optimism?page=3