The Bespoke Report — Another Four Years — 10/25/24
We’re quickly closing in on Election Day 2024, so in this week’s Bespoke Report we’ve got a number of market-related stats surrounding elections for you to ponder over so that you can take a break from all the political monitoring you’ve likely been doing more and more of lately as Election Day draws nearer.
We went back and read through our final weekly Bespoke Reports prior to the four Presidential Elections we’ve had since Bespoke was founded in 2007. It’s a great way to go back in time and see what was really happening in the days and weeks leading up to prior elections. You can view them by clicking the links below:
Bespoke Report Pre-Election 2020
Bespoke Report Pre-Election 2016
Bespoke Report Pre-Election 2012
Bespoke Report Pre-Election 2008
Reading through these prior reports was a reminder of the turmoil that was happening in the lead-up to recent elections. In 2008, the stock market was absolutely crashing from the Financial Crisis as Election Day neared. In 2012, the entire northeast was reeling from Super Storm Sandy. 2016 was actually the most mild of the four, but the S&P still rode a 9-day losing streak into the weekend before that Election. And in 2020, COVID was still top of mind with another “wave” happening. So far at least, 2024 has been tame relatively speaking. Hopefully it’s not just the calm before the storm!
Get caught up on everything going on in markets ahead of the 2024 Election by reading this week’s Bespoke Report newsletter. Read it now by signing up for our Bespoke Premium Election Special that gets you the first three months of access for just $47!
S&P Equal Weight vs. Cap Weight
The rise of the “mega-caps” in recent years has caused a significant divergence in the performance of the S&P 500 — which is market cap weighted — and the S&P 500 Equal Weight index. As the mega-caps like Alphabet (GOOGL), Amazon (AMZN), Apple (AAPL), Meta (META), Microsoft (MSFT), and NVIDIA (NVDA) have pushed ever higher into multi-trillion dollar companies, their weight in the S&P 500 has ballooned to more than 25% of the index. In the S&P 500 Equal Weight index, however, where each of the 500 stocks has a 0.2% weighting after quarterly re-balancing, the six mega-caps make up just 1.2% of the index. Given these differences, it’s easy to see how the performance between a cap-weighted and equal-weighted index can diverge.
As shown below, the cap-weighted S&P 500 has posted a total return of just over 110% over the last five years compared to a gain of roughly 84% for the S&P 500 Equal Weight index. As you can see in the chart, the gap between the two didn’t really start widening until early on during this bull market in early 2023.
Anecdotally, the cap-weighted version of the S&P 500 seems to be getting all the love these days, with some calling it the perfect momentum index. Combining that recent sentiment with the very clear differences between the two indices, readers may be surprised that the longer-term performance between the two has been similar and even tilts towards the equal-weight version.
As shown below, over the last 20 years, the cap-weighted index has just recently overtaken the equal-weighted index on a total return basis, but outperformance has gone back and forth many times over this time frame.
And since 1990, the equal-weighted version of the S&P has actually been the clear winner over the cap-weighted version.
As you can see in the chart below, the Dot Com Bubble of the late 1990s pushed the cap-weighted S&P solidly above the equal-weighted version in the final years of that bubble, but the bursting of the bubble and the 2003-2007 bull market resulted in a performance shift that allowed the equal-weight index to pull ahead. While the mega-caps of today have had a leg up on the rest of the market for the past few years, an extended period of underperformance from them would allow the equal-weighted version to become en-vogue again.
Below is a look at the differences in sector weightings for the S&P 500 (cap-weighted) and S&P 500 Equal Weight indices. By default, the sectors with the largest number of stocks in the index will have the highest weightings in the equal-weight index.
While the Tech sector makes up nearly a third of the cap-weighted index, it’s only 13.7% of the equal-weight index. Industrials and Financials each have a larger weight than Tech in the equal-weight index, while they combine for a weighting that’s just 2/3 of Tech’s weighting in the cap-weighted index.
When looking at the pie charts below, it’s the equal-weight version that appears more balanced and diversified at the moment. No sector has a weighting below 4.4% in the equal-weight index, while the cap-weighted index has four sectors with weightings below 3.3%. Movements in Materials, Real Estate, Utilities, and Energy have virtually no impact on the cap-weighted index as a whole these days.
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Chart of the Day: Remembering Black Monday
This content is for members onlyBespoke’s Morning Lineup — 10/18/24
See what’s driving market performance around the world in today’s Morning Lineup. Bespoke’s Morning Lineup is the best way to start your trading day. Read it now by starting a two-week trial to Bespoke Premium. CLICK HERE to learn more and start your trial.
“If machines are going to take jobs away from the worker, then he will need to find something else to do. Perhaps he’ll get back to the soil. But we must care for him during the period of change. We must keep him away from red literature, red ruses; we must see that his mind remains healthy.” – Al Capone
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
The S&P 500 is up a half a percent, the Nasdaq 100 is down a half a percent, and the small-cap Russell 2,000 is up 2.2% on the week as we get set for Friday trading. But S&P 500 and Nasdaq futures are trading up about a half a percent ahead of today’s open on the back of strong earnings results from Netflix (NFLX) after the close yesterday.
As shown below, the S&P remains elevated relative to its normal trading range and its 10-day advance/decline line has just ticked slightly back into overbought territory as well.
