Why this bull market’s ‘bad breadth’ is bunk

This bull's breath has been sweet all along. Bloomberg

Do markets suffer from halitosis? Bears say so, arguing this bull market reeks of “bad breadth” (referring to only a handful of stocks driving the market), sure to sour stocks’ fortunes.

First they claimed the "Magnificent Seven” US tech stocks alone drove it higher. As some slump, they harp on instead about a subset deemed the “Fab Four", or just the “Blazing Two". Will it soon be the “Wonderful One"?

Tune out all that nonsense.

This bull market’s sweet smell wafts far and wide, despite claims otherwise – it has all along. If anything, persistent talk about “bad breadth” shows only that more gains await. Let me explain.

Yes, the Magnificent Seven, referring to Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla, boomed after 2022’s low.

Some of those tech and tech-like stocks have wobbled lately. But most remain much higher, with Nvidia and Meta leading the pack.

Bears point to these firms’ heavy exposure to artificial intelligence as “evidence” that this bull market is mostly AI hype.

Wrong. How to know? Look where tech isn’t huge – like Europe.

While the eurozone boasts a few tech mini-hubs, like the Netherlands, the sector is only 14 per cent of bloc market cap versus the world’s 23 per cent. Yet eurozone stocks are up 4.7 per cent this year through April, right in line with global stocks’ 4.6 per cent.

Dig deeper. In local currencies to avoid skew, indexes hitting all-time total return highs this year include: Australia’s ASX 200, Britain’s FTSE 100, the MSCI Denmark, Ireland’s ISEQ, Germany’s DAX, the MSCI India, Italy’s MIB, Japan’s TOPIX, the Netherlands’ AEX and Spain’s IBEX.

Of those, only the Netherlands has much tech exposure. The rest mostly feature industrials, consumer durables, financials, health care or even utilities.

This bull market wasn’t ever just the Magnificent Seven, the Fab Four or the Blazing Two.

Yes, return magnitudes vary. But 57 per cent of the MSCI All-Country World Index’s more than 2,800 stocks rose in the 12 months ended April 16. In full, 932 stocks also outperformed its 17.5 per cent return. This fabulous bull market is and was significantly global and far broader than fantasised.

We remain early in this process. Remember investing legend Sir John Templeton’s wisdom: “Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria.”

We didn’t simply fast-forward from 2022’s deep, dark pessimism – when most thought the world was doomed to horrific recessions – into euphoria.

More like a grinding, gradual back and forth climb towards early optimism, as I detailed in March.

Consider history’s bubbles for a deeper dig at this.

Leading to the burst of 2000’s US dot-com bubble, initial public offerings flooded markets for years. While US IPOs tallied about $123 billion in proceeds in the 1980s, that soared to more than $463 billion in the 1990s, adjusting for inflation. That frothy ride culminated with 1999’s $96 billion. Then 2000 added another $93 billion.

Over time, these offerings’ quality fell as investment bankers thirsting after huge fees pushed any slop to market. Even 2021’s froth saw myriad low-quality special-purpose acquisition companies debut.

Where are today’s IPOs?

Some analysts note total listings are rising. True, but that is an increase from rock-bottom levels – 2022 and 2023 marked the lowest two-year stretch for US IPO proceeds since 1984-85, after adjusting for inflation.

Globally, 2023 featured the lowest volumes in a decade. Hence, while $7.8 billion in first-quarter US IPO proceeds has some optimism, we are aeons from 2021 – when full-year proceeds topped $100 billion and Spacs (now near non-existent) raked in even more than that. Most were far flimsier than today’s higher-quality issues.

So, no, we aren’t near euphoria – which lingering Fab Four obsession proves. Bubble talk never flourishes in actual bubbles. Then, people are blind to flaws. To me, sentiment still seems barely optimistic.

Against this, we have a massively misunderstood return of normal, pre-pandemic economic growth and inflation rates.

Consider this. Before 2020’s collapse, the world economy routinely grew about 3 per cent. Then Covid skewed economic data wildly, with global GDP imploding minus 2.8 per cent in 2020.

Data from the International Monetary Fund for 2021 shows global GDP growing a red-hot 6.3 per cent. That reverted in 2022 to a historically normal 3.5 per cent.

The US's “disappointing” 1.6 per cent first-quarter growth? Not out of line with normal pre-pandemic fluctuations – and better than pundits claimed.

Strong imports – a sign of healthy domestic demand – and inventory depletion both detracted from growth. But private sector components, including consumer spending, business investment and residential real estate, grew by 2.6 per cent on an annualised basis. Fine growth.

Sceptical doubting of normal growth’s return is classic bull market fuel.

That people can’t see this, but instead grouse over allegedly bad breadth, is truly rosy news.

Ken Fisher is the founder, executive chairman and co-chief investment officer of Fisher Investments, a global investment adviser with $250 billion of assets under management