It’s Simple Speculation, Not a Preference For Quality

Many stock market observers have commented regarding the market’s narrow leadership. This is a fact, which by some measures has reached historic extremes.

However, few observers agree why this narrow leadership is occurring. Some, like us, believe there are similarities between the recent outperformance of technology shares and the significant appreciation in cryptocurrencies attributing both to speculation fueled by the belief the Fed will soon be returning to a regime of cheap and abundant liquidity, i.e., the Fed “pivot”.

Others believe there is a fundamental justification for this narrow leadership. They claim corporate profits are under pressure, and the narrow leadership reflects investors’ preference for stronger balance sheets during difficult times rather than simple speculation.

As the researchers who first came up with macroeconomic theories in the early-1990s on why there are cycles of growth and value, we disagree with the fundamental assessment. First, the dire implied economic forecast of such narrow leadership seems unrealistic. Second, year-to-date performance data seems to reflect a more speculative sector preference than a fundamental one based on quality.