Market Messages
A few subtle financial market themes
Just a few financial market messages which should be considered including when will the equal-weighted S&P 500 index (EWSP) finally outperform, why the unemployment rate bodes ill for real S&P EPS, customer margin account debit balances “look” concerning, world uncertainty is driving gold, animal spirits are just now awakening, and smalls finally standing Tall.
1. When will the Equal-Weighted S&P 500 Index finally Outperform?
The market-cap weighted S&P 500 index has been dominating the large cap stock market for more than a decade. Will a more diversified approach – a more equal-weighted S&P investment allocation – ever win again?
As demonstrated in chart 1, whether and when the EWSP index finally outpaces the overall stock market is much more straightforward than appreciated – when bond yields decline again! Since 1990, the relative total return performance of the EWSP index is closely correlated with “inverse” movements in the 10-year U.S. Treasury yield. While this relationship was briefly interrupted during the last couple years of the dotcom boom and again during the early stages of the 2020 pandemic, for the most part, the relative performance of the EWSP index has move quite closely with bond prices (or inversely with bond yields).
Bond yields trended mostly lower from 1990 to 2010 making EWSP investment bets winners! However, since the Great Financial Crisis, bond yields have bottomed and mostly trended higher making equal-weighted bets less attractive. The question on how much investors may want to consider diversifying away from the increasingly concentrated weighting of the S&P 500 depends primarily upon your yield outlook. If the 10-year yield is headed toward 6%, it may be best to stay in the market-cap weighted S&P 500 index. However, if yields are headed to 3% or less – as I think likely in the next couple years – lifting the EWSP portfolio allocation may prove successful.
As shown in chart 2, if you are expecting lower bond yields, a good alternative for the EWSP Index may be high dividend yield stocks as proxied by the S&P 500 Dividend Aristocrats Index. This index was a very popular investment choice between 2000 to about 2020. Since 1990, the relative performances of these two investment alternatives have tended to move closely at least directionally (although with different magnitudes of relative results) and consequently both could outpace the overall market-cap weighted S&P 500 index should bond yields trend lower.
