Supplied
Is this bull market fragile? Many times, pundits measure a bull market’s strength based on how many stocks are performing well versus poorly, or its breadth. The common implication is low market breadth – when fewer stocks are performing well – means the bull market is rickety (and vice versa). Fisher Investments Canada’s reviews of market history differ, however, showing market breadth generally narrows as bull markets mature, but investors should recognize this isn’t an airtight relationship and breadth isn’t a timing tool.
Definitions of market breadth vary. Some track the number of stocks in a given index hitting new 52-week highs and lows, while others look at the advance-decline line (the ratio of advancing stocks to declining ones). Fisher Investments Canada’s preferred measure is the percentage of an index’s stocks outperforming over a given period of time. For example, how many of the MSCI Canada’s or TSX’s constituents are outperforming the index on a rolling 12-month basis? Generally, headlines focus on market breadth when it narrows, prompting concerns that a rally may be losing steam.
Yet market breadth typically narrows as bull markets mature, and not necessarily because the market weakens over time. Rather, it is a side effect of the general tendency for smaller stocks to lead early in bull markets and larger stocks to lead as bull markets mature. While there is no industry standard definition, index provider MSCI defines small cap stocks as the companies comprising the bottom 14 per cent of the index’s free float-adjusted market capitalization. That is the share price times the number of easily traded, liquid shares in existence.1 For some perspective, the MSCI World Small Cap index has 3,968 constituents – more than six times that of the MSCI World Large Cap index.2 Now, Fisher Investments Canada quibbles with these precise definitions, as we find many companies in the lower end of MSCI’s large-capitalization range act more like small cap stocks. Regardless, the logic holds: As a higher number of small stocks pass leadership to fewer large stocks, breadth narrows.
We see simple reasons for this leadership shift. Fisher Investments Canada’s reviews of market history show smaller, more value-oriented stocks, which are usually more sensitive to economic growth trends, tend to bounce highest and fastest early in bull markets after falling sharpest in the preceding bear market. As the economy recovers, the surviving small firms – now lean and mean via cost cuts and other efficiency measures – often see their earnings growth soar off low bases, sending their stock prices upward.
But as the bull market ages, firms’ earnings growth stems more from revenues than cost cuts or productivity boosts. That usually benefits larger companies with global footprints and diverse revenue streams. In this environment, large-cap and growth-oriented companies tend to take leadership as investors target the high-quality characteristics they commonly feature, including strong balance sheets, high margins and long-term growth prospects. Because there are fewer large cap firms, breadth narrows.
Exhibits 1 and 2 help show this.
Exhibit 1: Breadth Narrowed Throughout the 2010s’ Bull Market ...
Source: FactSet, as of Feb. 11, 2025. Percentage of MSCI World IMI constituents outperforming trailing 12-month MSCI World IMI returns with net dividends in CAD, Dec. 31, 2008 – Dec. 31, 2020.Supplied
Exhibit 2: … Because Leadership Shifted
Source: FactSet, as of Feb 11, 2025. MSCI World Large Cap Growth and Small Cap Value Index return with net dividends in CAD, Dec 31, 2008 – Dec 31, 2020.Supplied
Importantly, a maturing bull market isn’t necessarily a fragile one. Fisher Investments Canada’s reviews of market history show bull markets can chug along on narrow breadth long before turning over into a bear market.
Moreover, breadth can fluctuate during the market cycle; it isn’t a timing tool. For example, the percentage of MSCI Canada constituents outperforming the broader index’s 12-month rolling returns sank from May 2016′s 64.5 per cent to 37.2 per cent just 10 months later.3 Pundits warned the bull market was fragile, but it didn’t shatter. Breadth re-widened, the noise died down and the bull market continued.4 Or, refer back to Exhibit 1. The MSCI World IMI’s breadth narrowed to 21.8 per cent in August 2015. We heard similar concerns at this point. Yet those, too, proved premature, as the global bull market still had years left.5
While Fisher Investments Canada’s reviews of market history show these examples are outliers, they illustrate breadth’s limits as a reliable timing tool. Fluctuations notwithstanding, market breadth coincides with leadership trends, making it a measure of past performance and not predictive. Market breadth tells investors what has happened, not what will happen nor when cycles will shift.
Read Fisher Investments Canada's additional reviews of markets and financial topics.
1 Source: MSCI, as of Feb. 11, 2025.
2 Ibid.
3 Source: FactSet, as of Feb. 11, 2025. Percentage of MSCI Canada companies outperforming the trailing 12-month MSCI Canada return in CAD, Dec. 31, 2008 – Dec. 31, 2024.
4 Ibid. MSCI Canada return in CAD, Mar. 9, 2009 – Feb. 12, 2020.
5 Source: FactSet, as of Feb. 11, 2025. MSCI World IMI return with net dividends in CAD, Mar. 9, 2009 – Feb. 12, 2020.
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