Impact Capital’s quarterly research report seeks to highlight the latest developments most relevant to your investments and financial planning. In this installment of Three Market Themes, we focus on the recent positive trend in the S&P 500, the dominance of index ETFs over actively managed funds, and what the performance of the Consumer Discretionary ETF versus the Consumer Staples ETF says about the market’s future.

1. Not Bearish: Higher Highs and Higher Lows

The blue line shows each move in the S&P 500 more than three percent.

In general, since the COVID-19 low in 2020, the market has made higher highs and higher lows.

When you tune out the noise, you can see the trend is positive. Invest with the trend.

2. Index ETFs Are Tough to Beat

The chart shows the percentage of U.S. equity funds that underperform the market over rolling three-year periods. The data over time consistently shows most managers underperforming the market.

This analysis doesn’t even consider taxes, which are higher for actively managed funds than for index funds.

For all these reasons, we use mostly index equity ETFs in portfolios, since trying to cherry-pick funds that will beat the market is a losing game.

3. Consumer Stocks Show Bullish Trend

The bottom chart shows the performance of the Consumer Discretionary ETF versus the Consumer Staples ETF. The top chart is the U.S. stock market (S&P 500).

When Discretionary stocks outperform Staples stocks, the line rises. This condition has historically been bullish for the market.

This ratio just made new highs above the red line, which is another reason to be bullish about the stock market right now.