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It’s going to be a dismal day on Wall Street both literally and figuratively as “Tropical Storm” Fay moves up the east coast, and futures are firmly lower. Earnings news continues to be slow, but that will pick up next week as the big banks start to report. In terms of economic data, PPI is the only release on the calendar, and that came in weaker than expected on both a headline and core basis. That leaves us with the latest state by state COVID updates to contend with heading into the weekend.
Be sure to check out today’s Morning Lineup for a rundown of the latest stock-specific news of note, an update on the Federal Reserve’s balance sheet, credit growth in China, global and national trends related to the COVID-19 outbreak, and much more.
Every weekend it seems we see pictures from all over the country of people failing to follow guidelines on social distancing. While a lot of Americans seem unable to keep a modest distance between each other when they’re out and about, it hasn’t been a problem for equities. In yesterday’s trading, the cap-weighted S&P 500 fell 0.56%, while the equal-weighted index performed much worse, falling more than 1.60%. That’s a pretty wide gap!
We’ve seen a number of days this year where the performance gap between the two indices was as wide as yesterday, and on some days it’s been the equal-weighted index outperforming the cap-weighted index while on other days the performance gap has been flipped around. For the entire year, though, it’s been the cap-weighted index outperforming the equal-weighted index as investors continue to gravitate towards the mega-cap stocks like Apple, Microsoft, Amazon, Alphabet, etc. This has subsequently pushed the performance disparity between the two indices towards extreme levels.
To illustrate, the scatter chart below shows the YTD performance between the S&P 500 equal-weighted index (horizontal axis) and the cap-weighted index (vertical axis) through 7/9 for every year since 1991. Normally, there is a pretty positive correlation between the two indices as the dots tend to hug the trend line. In the case of 2020 (red dot), though, we’ve seen a pretty major disparity as the dot is nowhere near the trendline (Equalweighted index down 13.04% YTD compared to a YTD decline of 2.44% in the cap-weighted index).
Another illustration of the performance disparity between the two indices can be seen in the YTD performance spread between the two indices. The chart below shows the spread between the YTD performance of both indices by year since 1991. When the bars are positive it indicates that the cap-weighted index is outperforming the equal-weighted index and vice versa for negative readings. At a current spread of over ten percentage points, there has never been another year where one of the indices was outperforming the other by a wider margin.