A common theme espoused over the past year is the idea that strength in the large cap segment of the market is attributable to only a handful of technology companies, namely, the FANG stocks. A way to analyze this is to look at market breadth, which is one indicator of the overall health of the market. Though there are different ways to look at it, measuring market breadth at the industry level can show which areas are contributing to, or detracting from, an index’s performance with more granularity than at the sector level.
If it was actually the case that an index was being driven higher based on the outperformance of a select few stocks, it could be a reason to worry, given the historical association with narrow market breadth during bull runs and bubbles – the dot-com bubble of the late 1990s being a prime example. Additionally, if a broad market index’s gains are driven by only a small number of companies, then the index itself becomes a less accurate reflection of the economy.
Given investor focus on technology, a growth sector, we believe a closer look at year-to-date returns in the large cap growth space could help shed light on the subject. As the chart below shows, 24 of the 61 GICS industries (39%) that comprise the Russell 1000 Growth Index have outperformed the index so far this year – and Internet Software & Services and Internet & Direct Marketing Retail, which include the FANG stocks, are only 2 of those 24.
We believe claims that the market is being driven higher on the overwhelming strength of a select few technology stocks are largely overblown, and in our opinion, data on market breadth helps make the case for the potential continuation of the bull market.