The Stock Market is Down (Way) More Than You Thought in 2020

Jonas Elmerraji, CMT

Much fuss has been made about the seemingly miraculous recovery the stock market has made from its COVID-19 lows back in March.

There’s some truth to it, of course – we’re set to end Q2 with the best quarter in the books since 1998.

That’s why despite suffering one of the worst drawdowns on record in 2020, the big S&P 500 Index (^GSPC) - is only down about 4.13% on a total returns basis since the calendar flipped to January.

Problem is, that stat is very misleading right now.

It turns out that the stock market is down way more than most people realize in 2020.

How could that be?

It all boils down to the way the S&P 500 is calculated. Because it’s a market cap weighted index, the biggest stocks in the S&P have a disproportionate impact on the performance of the index. And this year, it just so happens that the biggest stocks have also been some of the best performers.

What that means is that the average S&P 500 stock is doing far worse than the actual S&P 500:

SPX_SPW
The S&P 500 Index vs. the S&P 500 Equal Weight Index

The S&P 500 may be down just 4% year-to-date, but the average stock in the S&P 500 is down just over 12%.

That’s an absolutely massive performance chasm.

If the S&P 500 were rebalanced today, the top 2% of stocks would make up around 30% of the value of the market.

And that number has been rocketing since the calendar flipped to January:

top10_SPX_wts

What does it all mean?

For starters, it means that anyone without exposure to the biggest names on the market: Apple (AAPL) -Get Report, Microsoft (MSFT) -Get Report, Amazon (AMZN) -Get Report, Alphabet (GOOG) -Get Report (GOOGL) -Get Report, Facebook (FB) -Get Report, Berkshire Hathaway (BRK.B) -Get Report, Verizon (VZ) -Get Report

You get the idea.

Anyone without exposure to those names is probably doing worse than the S&P in 2020. Maybe much worse.

And it’s an important reminder that buying what’s working is a sound strategy in crisis markets.

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