The US equity market made its most recent peak on June 8th.  From the March 23rd low through June 8th, the average stock in the large-cap Russell 1,000 was up more than 65%!  Since June 8th, the average stock in the index is down more than 11%.  Below we have broken the index into deciles (10 groups of 100 stocks each) based on simple share price as of June 8th.  Decile 1 (marked “Highest” in the chart) contains the 10% of stocks with the highest share prices.  Decile 10 (marked “Lowest” in the chart) contains the 10% of stocks with the lowest share prices.  As shown, the highest priced decile of stocks are down an average of just 4.8% since June 8th, while the lowest priced decile of stocks are down an average of 21.5%.  It’s pretty remarkable how performance gets weaker and weaker the lower the share price gets.  Like what you see? Click here to view Bespoke’s premium membership options for our best research available.

The Nasdaq has been outperforming every other US-based equity index over the last year, and nowhere has the disparity been wider than with small caps.  The chart below compares the performance of the Nasdaq and Russell 2000 over the last 12 months.  While the performance disparity is wide now, through last summer, the two indices were tracking each other nearly step for step.  Then last fall, the Nasdaq started to steadily pull ahead before really separating itself in the bounce off the March lows. Just to illustrate how wide the gap between the two indices has become, over the last six months, the Nasdaq is up 11.9% compared to a decline of 15.8% for the Russell 2000.  That’s wide!

In order to put the recent performance disparity between the two indices into perspective, the chart below shows the rolling six-month performance spread between the two indices going back to 1980. With a current spread of 27.7 percentage points, the gap between the two indices hasn’t been this wide since the days of the dot-com boom. Back in February 2000, the spread between the two indices widened out to more than 50 percentage points.  Not only was that period extreme, but ten months before that extreme reading, the spread also widened out to more than 51 percentage points.  The current spread is wide, but with two separate periods in 1999 and 2000 where the performance gap between the two indices was nearly double the current level, that was a period where the Nasdaq REALLY outperformed small caps.

To illustrate the magnitude of the Nasdaq’s outperformance over the Russell 2000 from late 1998 through early 2000, the chart below shows the performance of the two indices beginning in October 1998.  From that point right on through March of 2000 when the Nasdaq peaked, the Nasdaq rallied more than 200% compared to the Russell 2000 which was up a relatively meager 64%. In any other environment, a 64% gain in less than a year and a half would be excellent, but when it was under the shadow of the surging Nasdaq, it seemed like a pittance. Like what you see? Click here to view Bespoke’s premium membership options for our best research available.

It’s hard to believe that sentiment can change so fast in the market that one day investors and traders are bidding up stocks to record highs, but then the next day sell them so much that it takes the market down over 2%.  That’s exactly what happened not only in the last two days but also two weeks ago.  While the 5% pullback from a record high back on June 10th took the Nasdaq back below its February high, this time around, the Nasdaq has been able to hold above those February highs.

In the entire history of the Nasdaq, there have only been 12 periods prior to this week where the Nasdaq closed at an all-time high on one day but dropped more than 2% the next day.  Those occurrences are highlighted in the table below along with the index’s performance over the following week, month, three months, six months, and one year.  We have also highlighted each occurrence that followed a prior one by less than three months in gray.  What immediately stands out in the table is how much gray shading there is.  In other words, these types of events tend to happen in bunches, and if you count the original occurrence in each of the bunches, the only two occurrences that didn’t come within three months of another occurrence (either before or after) were July 1986 and May 2017.

In terms of market performance following prior occurrences, the Nasdaq’s average and median returns were generally below average, but there is a pretty big caveat.  While the average one-year performance was a gain of 1.0% and a decline of 23.6% on a median basis, the six occurrences that came between December 1999 and March 2000 all essentially cover the same period (which was very bad) and skew the results.  Likewise, the three occurrences in the two-month stretch from late November 1998 through January 1999 where the Nasdaq saw strong gains also involves a degree of double-counting.  As a result of these performances at either end of the extreme, it’s hard to draw any trends from the prior occurrences except to say that they are typically followed by big moves in either direction.  The only time the Nasdaq wasn’t either 20% higher or lower one year later was in 1986. Like What you see? Click here to view Bespoke’s premium membership options for our best research available.