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Is the Market in Late-Stage Terminal Illness?

By Matt Schreiber – WBI President and Chief Investment Strategist

While reviewing recent Russell 2000 Index and S&P 500 Index performance, we’re seeing similarities to the markets in 1998 and 1999. In 1998, the Russell 2000 Index decoupled from the S&P 500 Index. Usually, large-cap stocks and SMID stocks perform in tandem. However, there are times when they start to perform in different directions, which could be a signal of market changes to come. At the beginning of a bull market cycle, Russell 2000 stocks typically have higher earnings and revenue for a select period of time because of the growth aspects the index holds compared to large-cap stocks. However, towards the end of the cycle, the S&P 500 Index tends to outperform.

It seems as if the writing on the wall is becoming clearer. As you can see in the chart below, from July of 1998 to July of 1999, the Russell 2000 Index posted a negative return of 0.18%. Over the same time period, the S&P 500 posted staggering returns of about 21%. 

Source: Bloomberg as of 7/3/19. Past performance is not indicative of future results. Indices are unmanaged and may not be invested in directly.

Now, if we look at the same timeframe 20 years later, we can see the similarities to ’98 and ’99. The Russell 2000 Index was down 5.31% and the S&P 500 Index was up 10.4%.

Source: Bloomberg as of 7/3/19. Past performance is not indicative of future results. Indices are unmanaged and may not be invested in directly.

We can see that the spread is nearly identical to that of the chart from 1998 and 1999. Is this signaling that the market has a late-stage terminal illness? This could be a warning sign that this bull market cycle may be ending soon. Under normal circumstances, without the Fed and central bankers around the world intervening, you may have a similar risk factor to 1998 and 1999. This is a harbinger of significant risk and investors can’t afford to catch the market illness which could deteriorate their capital.

Important Information

Past performance does not guarantee future results. The views presented are those of Matt Schreiber and should not be construed as investment advice. Matt Schreiber or clients of WBI may own stock/sectors discussed in this article. All economic and performance information is historical and not indicative of future results. This is not an offer to buy or sell any security.No security or strategy, including those referred to directly or indirectly in this document, is suitable for all accounts or profitable all of the time and there is always the possibility of loss. Moreover, you should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from WBI or from any other investment professional. To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation, please consult with WBI or the professional advisor of your choosing. This information is compiled from sources believed to be reliable, accuracy cannot be guaranteed. Information pertaining to WBI’s advisory operations, services, and fees is set forth in WBI’s disclosure statement in Part 2A of Form ADV, a copy of which is available upon request.

Russell 2000 TR Index: measures the performance of 2,000 small-cap U.S. companies where dividends are reinvested automatically. S&P 500 TR Index: includes a representative sample of large-cap U.S. companies in leading industries where all cash payouts (dividends) are reinvested automatically.

You are not permitted to publish, transmit, or otherwise reproduce this information, in whole or in part, in any format to any third party without the express written consent of WBI Investments, Inc.

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