Breadth of recent rally is something not often seen

Christian J. Galipeau

Christian J. Galipeau
Senior Investment Director, 07/01/20


Market-capitalization-weighted S&P 500 Index versus the equal-weighted S&P 500 Index

The S&P 500 Index is the most-referenced equity index. The index is weighted by the market capitalization of its components. The larger the market cap, the greater the impact on the index.

There is another version of the S&P 500 Index that simply gives each stock component the same weight. As a result, the impact of the stocks with the largest market capitalization is the same as the impact of the smaller stocks within the index. This index is the equal-weighted S&P 500 index. This year, the S&P 500 Index bottomed on March 23, 2020, at 2,192. Through June 9, the market-cap-weighted S&P 500 has rallied approximately 47%. Interestingly, the equal-weighted S&P 500 Index has rallied approximately 59% during the same period.

Market-capitalization-weighted S&P 500 Index, 3/23/20–6/9/20 null

Equal-weighted S&P 500 Index, 3/23/20–6/9/20

What this suggests is that the “average” stock is performing much better than most investors would probably think or believe. The most critical takeaway is that it is not just the FAANG (Facebook, Amazon, Apple, Netflix, and Google) complex plus MSFT that is working. This rally is broad. We looked back over the past 20 years to see when the equal-weighted S&P 500 Index outperformed the capitalization-weighted S&P 500 Index coming off a major market bottom. The last time this happened was in the fall of 2002 as the recession following the TMT (Tech, Media, Telecom) collapse and September 11 terrorist attacks was ending. From the October 2002 bottom until the top in 2007, the market-capitalization-weighted S&P 500 Index rallied 102.07%, or 15.86% annualized, while the equal-weighted S&P 500 Index rallied 139.74%, or 22.32%. The average stock significantly outperformed.

Market-capitalization-weighted S&P 500 Index, 2002–2007

Equal-weighted S&P 500 Index, 2002–2007

Conclusion

The equal-weighted S&P 500 Index outperformed the market-cap-weighted index from the market low of 2002 until the top of 2007 as the United States emerged from recession. The average stock performed significantly better, relative to long-term returns, in that 5-year period. We just witnessed a similar pattern from the March 23, 2020, low where the equal-weighted index outperformed the market-cap-weighted index. This recent experience is only the second observation in the past 18 years.

We think it is worth pointing out that the breadth of this recent rally is truly rare.

The S&P 500 Index is an unmanaged index of common stock performance. You cannot invest directly in an index.

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