By Michael Wilson, chief US equity strategist at Morgan Stanley

One of the key technical factors I’ve used over time to gauge the health of equity markets is the breadth of participation by the underlying stocks. Recently, we have fielded many questions from clients about breadth, as many have noted that December has exhibited some of the worst breadth in history while stock indices have remained near all-time highs. This anomaly is unusual, but some have concluded that breadth may not matter as much as in the past as a signal for price. In my experience, ignoring breadth is usually a bad idea, and this past week suggests that breadth has anticipated what we learned on Wednesday – i.e., the Fed may not be able to deliver as much accommodation as markets were expecting.

Interestingly, the deterioration in breadth that started at the beginning of December coincided with a steady climb in 10-year UST yields, ultimately rising above our key 4.5% threshold where we’ve seen rates become a headwind for stocks. Indeed, the correlation with equity multiples flipped to negative when this occurred.