They grow up so fast! The bull market just turned four years old. That doesn't seem like much, but it marks the longest stretch since the one that began after the financial crisis in 2009. This week will see a wave of quarterly earnings reports as the season starts off in earnest with big Wall Street banks. Market volatility is usually good for their bottom lines and we've had a lot of it. Stock futures point to a mixed open.
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Nifty Fifty Redux
Stocks are near a record, but lots of them are in the doghouse, too. It's the investing edition of "two things can be true at once."
Only one-third of stocks in the S&P 500 index were trading above their 50-day moving average as of Friday, even as the benchmark flirted with an all-time high. You might have heard about that narrow leadership-"bad breadth," as the overused gag goes.
Many pundits say that's a problem, but it's complicated. Short-term breadth readings only occasionally signal a pullback, and usually just a minor one.
It's also the history of markets in a nutshell. Diversified investors own hundreds of companies, yet most stocks don't earn investors money in the long run. A small minority have produced half of the historical gain over the past century.
Sometimes, though, narrow market action really precedes a major cyclical turning point. It happens when certain stocks get big and then produce an outsize share of market gains over a short time span, powering the index higher on their own.
That trend can be seen by comparing the cumulative return you'd earn buying the same amount of every stock with the standard index that holds them in proportion to their market value.
The equal-weighted version of the S&P 500 has been trounced by the widely followed capitalization-weighted version for years now. That went into overdrive when ChatGPT was released in November 2022 and AI became the only game in town.
When one group of large companies opens up a big gap in just a handful of years, it precedes an even faster reckoning, and usually a bear market. Great technological advancements don't change that. The pattern held for radio, the Nifty Fifty and dot-coms, and this time probably isn't different.
Since ChatGPT's unveiling, the capitalization-weighted S&P 500 has earned nearly 50 percentage points more of total return than the equal-weighted one. To pick a historically similar moment to ChatGPT, the S&P 500 was beating its equal-weighted twin by an almost identical amount the same number of trading days after Yahoo's 1996 initial public offering.
Maybe the equal-weighted index is just worse? Nope.
It has beaten the S&P 500 since 1990. That's no accident because keeping an equal weighting forces an index to favor smaller, cheaper stocks-two factors known to boost long-run returns.
The more interesting point is when an equal-weight index wins. Like a rubber band stretched tight, it catches up a lot more quickly-and painfully-than it took to pull it into that shape.