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Is the Recent Upside in Market Performance Justified?

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RANDY FREDERICK: Despite all the challenges in Washington, D.C., the economy and the markets are actually doing quite well. Liz Ann Sonders, Schwab’s chief investment strategist, joins me for the July 18 Schwab Market Snapshot to discuss whether these lofty levels are justified or if, perhaps, the market may be just a little bit ahead of itself. Welcome back, Liz Ann.
 
LIZ ANN SONDERS: Thanks, Randy, and thanks, everybody for tuning in.
 
RANDY: So, Liz Ann, within the last week or so we’ve seen virtually all of the major market indices at all-time record highs. Obviously, that means we’ve got upside momentum. But does it also suggest that maybe there’s some near-term risk?
 
LIZ ANN: Yeah, you know, small-caps, large-caps, the S&P, Dow, the transports, the New York Stock Exchange advance/decline line, all are at or near all-time highs. And that is a fairly rare occurrence, probably less than 2% of the time. Now, that shows upside momentum, as you suggested, Randy, but if you look back at history and the rare occasions that this has happened in the past, you also tend to see some near-term choppiness, a little bit of weakness.
 
Also, in keeping with our focus on large-caps over small-caps, is that when you’ve seen this in the past and if it includes small-caps as one of those indexes hitting all-time highs, actually small-caps have underperformed large-caps looking ahead. So that’s another background support condition for that large-cap bias that we have.
 
RANDY: Well, one thing that I found really interesting is that this really appears to be a very broad-based market. But if you break the market down into its 11 sectors it turns out that only two of them have actually hit all-time highs recently. So can you discuss this sector performance in terms of overall market performance?
 
LIZ ANN: Yeah, what sectors have been doing this entire bull market is interesting, in that unlike many bull markets in the past, we haven’t had that one dominant leadership sector. And, more recently, we’ve had an increase in these sector rotations, kind of sector-based corrections, where it’s rotational in nature, and I think that’s a healthy background condition for the market. Money that moves from an outperforming sector finds its way into maybe an underperforming sector.
 
Interestingly, looking back in the past, when we’ve had these weaker trend-type markets, with lower correlations, greater dispersion in terms of sector performance, that’s been a pretty good environment for the stock market overall. So that as a background condition is actually a positive.
 
RANDY: Yeah, that’s some fascinating stuff. You know, one thing that we haven’t talked about, though, is investor sentiment. Has the recent market performance had any impact on that?
 
LIZ ANN: Well, there’s lots of sentiment indicators that I look at, but a pair of them that I find particularly interesting is put out by SentimentTrader.com. Now, they call them their Smart Money and Dumb Money Confidence Indexes. That is not our labels. That’s Sentiment Trader’s labels, but they’re real money gauges. In the case of the Smart Money, the big institutions, commercial hedgers, position traders. And in the case of their label of Dumb Money, it would be the smaller odd-lot traders, typically more on the individual investor side.
 
Usually, they are diametrically opposed in their view of the market. If the Smart Money is extremely optimistic, the Dumb Money tends to be pessimistic, and vice versa. Interestingly, now, both are fairly optimistic, about 60% on that scale of zero to 100, which is relatively optimistic. In the past, that has led to some near-term choppiness in the market, so very much in keeping with some of the things we discussed in the last couple of questions.
 
RANDY: Thank you, Liz Ann. I think you’ve given some investors some very interesting things to think about. That’s all the time we have. Listen, if you want to read more from Liz Ann, you can do that in the Insights section of Schwab.com. You can follow Liz Ann on Twitter @LizAnnSonders, and you can always follow me on Twitter @RandyAFrederick. We’ll be back again. Until next time, invest wisely. Own your tomorrow.

Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

Please note that this content was created as of the specific date indicated and reflects the author’s views as of that date. It will be kept solely for historical purposes, and the author’s opinions may change, without notice, in reaction to shifting economic, market, business, and other conditions.

Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Supporting documentation for any claims or statistical information is available upon request.

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

Small cap funds are subject to greater volatility than those in other asset categories.

Investing involves risk including loss of principal.

Diversification strategies do not ensure a profit and do not protect against losses in declining markets.

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