It's been a rough three years for stocks, hasn't it? Well, that's what you might think. After all, the S&P 500 has fallen 38% from its peak in March 2000 when it briefly touched 1552. What you may not realize, however, is that slightly more than half of the stocks in the index are actually higher today than they were during the peak of the market bubble. In fact, the equal-weighted S&P 500 index hasn't budged from where it was back in March 2000, although it is down 16% from its May 2001 high.
"People shouldn't blindly pursue a cap-weighted index," said Tom McManus, chief investment strategist at Banc of America. "That's what caused many investment strategies to go off a cliff in 2000." In a weighted index, stocks with large market capitalizations -- like Microsoft ( MSFT) and General Electric ( GE) -- have a bigger impact than those with smaller market caps. Because big companies are often widely owned and contribute greatly to overall earnings growth, some investors consider a weighted index to be more representative of the economy. But an equal-weighted index can give a better sense of how most stocks are performing because it isn't skewed by size. Since the start of the year, the unweighted S&P index is up 15% compared to just 8.9% for the weighted index. And Carlos Asilis, fund manager at Vega Asset Management, thinks this trend can continue as small-cap stocks continue to outperform their larger brethren. He noted that small-cap valuations remain attractive and said these stocks should hold up well in a period of rising long-term interest rates.