As we discussed a few weeks ago in our weekly recap regarding the Magnificent Seven, the mega-cap stocks have had a great year. But what about the rest of the equity universe? The short story is that it’s been a tough year for smaller companies with rising interest rates and forecasts for an impending recession. No doubt the struggle has been real for these small-caps. However, we might just be getting closer to a change of direction.
First, we’ll take a quick look at the Russell 2000, a stock market index that tracks the performance of 2,000 small-cap companies in the U.S. Without sugarcoating the situation, the index has had a poor year, down about -3%. After a substantial start to the year, it has dropped almost -16% since July 31. Compare that to approximately -5% declines for the S&P 500 and the Nasdaq Composite, which makes it feel even more painful.
But it’s more than just the smallest companies having a tough run. Next, we’ll compare the S&P 500 and its equal-weighted counterpart. The latter allocates an equal percentage to each of the 500 companies instead of basing it on market capitalization. This means that the smallest companies have the same impact on the total, which gives a more transparent look at the breadth of the market movements.
This week, the first three days saw the S&P 500 trading higher on the day while the equal-weighted version traded lower. In just the first four days of this week, the equal-weighted index underperformed the cap-weighted index by 1.5%. Since July 31, it is down double digits as well. And over the last 200 trading days, the performance gap between the two indices now stands at over 15 percentage points. A variance that wide is virtually unheard of, and since 1990, it has only been wider on 55 trading days. Moreover, all those days occurred in the late nineties and early aughts.
The record performance gap between the market cap and equal-weight versions of the S&P 500 briefly exceeded 20 percentage points on a single day in March 2000. Still, there were multiple occurrences in the early 2000s and after the Financial Crisis when the performance gap was over 20 percentage points in the other direction, favoring the equal-weight index. It’s interesting how these two measures have moved over time, but one takeaway seems relatively transparent. These periods of extreme over or underperformance tend not to last exceptionally long; at some point, they will revert to the mean.
Economy
- The follow-through from last week was mixed, with the S&P 500 up 1.3%, the Nasdaq up 2.4%, and the small-cap Russell 2000 down -3.1%. The week finished strong on Friday after a tepid Thursday when Chair Powell said they’d raise rates again if the data warranted it.
- The average contract interest rate for 30-year fixed-rate mortgages in the U.S. declined for a second consecutive week to 7.61%.
- The number of Americans filing for unemployment benefits eased by 3K from last week’s upwardly revised value to 217K, in line with market expectations of 218K.
- Continuing claims rose by 22K to 1.834M in the final week of October, above market expectations of 1.820M and to their highest level since April, suggesting that the unemployed are having greater difficulties finding employment.
- According to preliminary University of Michigan Consumer Sentiment survey results, consumer confidence in the U.S. decreased to 60.4 in November from 63.8 in October.
Stocks
- U.S. equities were in positive territory. Technology and Communication Services were the top performers, while Energy and Utilities lagged. Growth stocks led value stocks, and large caps beat small caps.
- International equities closed lower for the week. Emerging markets fared better than developed markets.
Bonds
- The 10-year Treasury bond yield increased seven basis points to 4.63% during the week.
- U.S. bond markets were in negative territory this week, while International bond markets were positive.
- Corporate bonds led for the week, followed by government bonds and high-yield bonds.
