The markets rarely give a clear and complete explanation of what they are doing, nor do they owe us. Even so, the messages sent by recent action are particularly dire, conveying mixed signals about investors’ risk appetite and where the economy and markets are in the current cycle. their period. In the 17% rise from the mid-June low in the S&P 500 index and the slight decline over the past week, leadership comes from a counterintuitive mix of utility stocks (in the style of traditional defensive) and industrial (classic cyclical) and Apple (steady growth. stock, somehow both loved and undervalued). Eclectic equity leader Utilities was the only sector to hit new record highs in the recent rally, delivering a total return of 10% in a year as the S&P 500 fell the same amount. The Utilities Sector SPDR ETF (XLU) has even outperformed the S&P 500 since the market hit a June 16 low, an unusual performance for a defensive group – one that appeared late in the day. economic cycle – in a risk recovery rally that some lights like a new bull market. However, industries have also rallied, ahead of the broader market’s term so far, with technical analysts welcoming the trend’s improvement, in what often looks like a cyclical indicator. textbook on a new market and economic growth trends. There is some logic to this apparent paradox, with rising natural gas prices driving up prices for many utilities, but mostly there is confusion. Apple, a sector of one and then Apple, is not a creature of the economic cycle like a wealth-creating beast that threatens to consume ever larger expansions of the S&P 500. coupons just over 3% off. about 6% off the all-time high. It’s also at a record against the Nasdaq 100 and has added nearly $700 billion in market value since its June 16 low. Apple, with earnings forecast nearly 27 times over the next 12 months, isn’t as expensive as it gets. this compares with the S&P 500 for decades. The stock, with a market value of $2.75 trillion, now has a 7.4% weight in the S&P 500, the highest of any stock in decades. This makes it larger than the energy and materials sectors combined, and roughly equal to the 7.9% share of the industries. The S&P 500 industry sector has 71 companies that employ more than 4 million people and will rake in about $1.6 trillion in revenue this year. The aggregate industry trades in line with the S&P 500 index at just over 18 times futures earnings. Of course, Apple is a single company with 154,000 employees, reaching $400 billion in revenue this year. What do Apple’s remarkable momentum and lavish capitalization tell us about investor priorities and macro expectations? It’s not easy to say. It’s not excitement versus growth: the company forecasts revenue and earnings growth of 4% and 6%, respectively, in fiscal year 2023 (which kicks off in six weeks). Yes, there is a sense of safety and financial quality in the name, but many relatively solid stocks don’t do much. It’s also not the case – as has sometimes happened in previous years – that a period of strong Apple outperformance is occurring at a time when wider band has weakened. In fact, the breakout from the lows registered some rather rare “thrust in breadth” signals, such as the overwhelming proportion of stocks above the 20- and 50-day moving averages, creating the basis for the unproven but plausible case that a bull market is underway. The similarly-weighted S&P 500 is still beating the benchmark based on market capitalization this year by 3 percentage points, despite Apple’s best efforts. No, Apple’s persistence simply underscores its unique position, an industry and almost all of its “style factor,” which equity investors see as a ballast in the market. tough and is the biggest sail when the wind is favorable. The stock is in nearly 400 ETFs and has a 10% surplus position in dozens of tech, growth, and ESG portfolios. Suffice to say, though, it’s still institutionally owned by its massive index weight and a 5.7 percent stake in Berkshire Hathaway. For all its other attributes, Apple is also a continuous stock, not a reliable common ground for the rest of the market or the economy. Even here, however, it is still going strong, up 30% in the past two months for the 11th time since 2001, according to Bespoke Investment Group. Somewhat surprisingly, after the previous two months of gains of this magnitude, the stock continued to perform well thereafter, with negative returns only once in the next six months (in 2008), according to Bespoke’s calculations. Navigating opposing lines Given those characteristics, Apple’s next decisive move will have a dominant impact on the tape but won’t say much about a cycle that doesn’t fit many historical stipulations. Meanwhile, the bond market is pricing in another full percentage point of Federal Reserve rate hikes in the coming months followed fairly quickly by a possible cut. contrary to the consistent (if required) insistence of Fed officials that such volatility is unlikely. The market seems to prefer this hypothetical path, accepting the concept of a so-called dovish pivot even though historically the move to easing has not been a good thing for stocks. The start of an easing cycle usually means the Fed has gone too far and the economy is suffering (although the 1994-1995 “soft landing” was hailed as a bright exception). From the outset, the compressive nature of the cycle, extreme levels of stimulus, intense supply and demand shocks due to the pandemic and reopening, and sky-high asset valuations have affected many futures. typical economic and market cooperation. Remember earlier this year when Wall Street was busy telling us that stocks were trending up several months after the Fed started raising rates? The market crashed two months before the first rally and then continued to fall. And if the seasoned patterns are being challenged, how do we read the fact that the S&P 500 has reclaimed more than half of all bear market losses at last week’s high? Since 1950, the market has never rolled to a new low after dropping more than 20% and then retracing more than half of the drop on a closing basis. It’s a positive sign, if nothing else, for sure. And so far, pullbacks appear quite often. Another plus: There is a clear level of skepticism among investment professionals that the bull market is trustworthy. However, as 2022 is proving, there is no clear message from the market and no guarantees for investors.