Most Stocks Are Not Doing As Well As The Averages
It’s been a fascinating six months for the equity markets, especially considering how things changed when the market hit bottom on March 23rd. Until that date, stocks such as Alphabet (a.k.a., Google) and Facebook were going nowhere fast. Then the pandemic forced us to give up lives of flexibility and personal contact and shift to virtual life in the digital world. Amazon, Facebook, and Netflix rose on a tidal wave of use.
It seems likely these beneficiaries will continue to prosper until the options we used to have are available again. Their success, however, is not widely shared.
This is well illustrated by the comparison between the performance of the Standard & Poor’s 500 Index, which is capitalization-weighted, and the S&P 500 Index when measured on an equal-weighted basis.
Let me explain the difference. The index as stated includes companies of all sizes. Some are huge; others are tiny. When the shares of the biggest companies rise or fall, the impact on the index could be 100 times or more than the price movement of the smallest companies.
Think of a circus with 500 animals, including elephants and monkeys. Which do you think would carry the most weight? It’s the same with the S&P 500 Index.
When the index is viewed on an equal-weighted basis, the impact of each of the companies is identical, regardless of size.
The comparison between the cap-weighted and equal-weight indexes is striking.
Over the last six months (essentially year to date), the cap-weighted S&P 500 index fell by 6%. The equal-weighted index dropped by 15%. In other words, most stocks are way behind the market.
What are often referred as blue chips have done even worse. Banks such as J.P. Morgan, Bank of America, and Citi are all down by more than 30%. And then there’s AT&T, which lost 26%.
The quarters ahead will certainly be filled with further market volatility, sparked by interim reports of employment, unemployment claims, corporate earnings, actions by the Federal Reserve, campaigns for the upcoming presidential election, as well as progress in the battle against the COVID virus. More likely than not, prices will bounce around through a broad, extended trading range while we wait for good news about therapeutics and vaccines.
Although we continue to deal with a bombardment of doom and gloom, the passing of each day gets us closer to the medical breakthroughs needed.
N. Russell Wayne, CFP®