Impending Crash? Not So Fast
It’s only April, but 2021 is shaping up to be a great year for investors.
Already, the big S&P 500 Index is up more than 11% since the calendar flipped to January. Just to put that in perspective, if stocks kept up that pace, we’d be on track for a 42% rally in the S&P in 2021.
That makes 2020’s stout 18% total return for the S&P 500 look downright anemic by comparison…
Better yet, the market is up way more than it appears this year!
How could that be?
It all boils down to the way the S&P 500 is calculated. The big index is market cap-weighted. That means that bigger stocks like Apple, Microsoft and Amazon have a disproportionate impact on the index.
If the S&P 500 were rebalanced today, the top 2% of stocks would make up around 30% of the value of the market.
Put simply, if those big stocks are having a bad year, so is the S&P — even if everything else is doing well.
Last year, we saw that happen in reverse. The biggest stocks on the market had a phenomenal year compared with everything else, leading to a situation last summer where the S&P 500 was up but the average stock in the S&P was down.
But this year, the average stock in the S&P is up a lot more than the index…
In fact, the typical S&P component is up nearly 17% since Jan. 1!
Have a look:
In the plot above, the dashed line is the S&P 500. The solid line is the S&P 500 Equal Weight Index — it measures the return of the average stock in the index by weighing all 500 companies equally.
The two started to diverge in February, and the gap has been widening.
That could be a very good thing.
The difference between these two indexes essentially measures “market breadth.” The idea is that a healthy rally is one where many stocks participate, not one where a couple big names are dragging dead weight in the index higher.
The current state of this spread bodes well for this rally’s staying power in 2021. Fact is, markets can remain at or near their all-time highs much longer than most folks realize. In fact, a study we did last year showed that nearly half of all trading sessions in the past 92 years have closed within 10% of all-time highs.
Hovering near record highs is the market’s “normal territory” — not a sign of an impending crash.
Right now, the stock market is up way more than the raw index numbers indicate…
And that could be a great thing for us as tech investors for the rest of 2021.
Jonas Elmerraji, CMT