Bigs caps trail big time
Bespoke Investment Group detailed the following year to date performance results for two major indexes last week, comparing those ubiquitously quoted market cap weighted indexes with parallel equal weighted results:
---S&P 500 index year to date, plus 20.42%; equal weighted S&P 500 year to date, plus 38.95%
---Russell 3000 index year to date, plus 22.31%; equal weighted Russell 3000 index year to date, plus 56%.
Simply stated, these results show that the biggest companies in these indexes have significantly, very significantly, underperformed the smaller ones. In recent years a widely observed phenomenon has been that some of the largest companies with the strongest balance sheets, most profitable global franchises, and attractive dividends have been lackluster stock market performers. Waiting for the expected break out to reflect the strength of these companies has been a boring and minimally rewarding ride. JNJ, for one, is a prime example of this type of company. The accepted rationale for this situation is that huge companies can no longer, by virtue of their size, have high growth rates that attract the leading steer investors. That reason is lame from a corporate finance analytical standpoint but it may reflect the reality of the mindset of today's investors. Apart from this, why is there the incredible divergence between market weight and equal weight performance in 2009? Possible answers related to this performance are:
---the smaller caps fell faster and harder in 2008 as their balance sheets were more suspect during the credit seizure. Therefore they had more room to climb back to some norm in 2009.
---the thinner liquidity of the smaller caps subjected them to extreme volatility during both the panic downturn and 2009 rebound.
---less liquidity also made some of these stocks more vulnerable to bets and rumors planted for market manipulation by traders, especially on the downside during the panic.
---many of the large caps, on the other hand, declined more gently in 2008. There were of course names like AIG, C, and others that imploded but on the whole the large caps had a shorter distance back to reach a more normal valuation in 2009.
---large caps are much more subject to a hostile set of regulatory, legal, and political issues in this climate that follows the financial panic and continues with the extended recession and high unemployment rates. That the President and members of Congress tend to make broad brush comments about corporate greed and irresponsibility is not reassuring to investors in general when looking at the large caps.
The guess here is that while the smaller caps have significantly outperformed the large caps in 2009 to date, the gap in performance will narrow as aberrant valuations in the small caps are addressed. The smalls will slow down, the larges will plug along, the VIX will continue to moderate, and blood pressure rates will decline into the holiday season. Is that really possible???
---S&P 500 index year to date, plus 20.42%; equal weighted S&P 500 year to date, plus 38.95%
---Russell 3000 index year to date, plus 22.31%; equal weighted Russell 3000 index year to date, plus 56%.
Simply stated, these results show that the biggest companies in these indexes have significantly, very significantly, underperformed the smaller ones. In recent years a widely observed phenomenon has been that some of the largest companies with the strongest balance sheets, most profitable global franchises, and attractive dividends have been lackluster stock market performers. Waiting for the expected break out to reflect the strength of these companies has been a boring and minimally rewarding ride. JNJ, for one, is a prime example of this type of company. The accepted rationale for this situation is that huge companies can no longer, by virtue of their size, have high growth rates that attract the leading steer investors. That reason is lame from a corporate finance analytical standpoint but it may reflect the reality of the mindset of today's investors. Apart from this, why is there the incredible divergence between market weight and equal weight performance in 2009? Possible answers related to this performance are:
---the smaller caps fell faster and harder in 2008 as their balance sheets were more suspect during the credit seizure. Therefore they had more room to climb back to some norm in 2009.
---the thinner liquidity of the smaller caps subjected them to extreme volatility during both the panic downturn and 2009 rebound.
---less liquidity also made some of these stocks more vulnerable to bets and rumors planted for market manipulation by traders, especially on the downside during the panic.
---many of the large caps, on the other hand, declined more gently in 2008. There were of course names like AIG, C, and others that imploded but on the whole the large caps had a shorter distance back to reach a more normal valuation in 2009.
---large caps are much more subject to a hostile set of regulatory, legal, and political issues in this climate that follows the financial panic and continues with the extended recession and high unemployment rates. That the President and members of Congress tend to make broad brush comments about corporate greed and irresponsibility is not reassuring to investors in general when looking at the large caps.
The guess here is that while the smaller caps have significantly outperformed the large caps in 2009 to date, the gap in performance will narrow as aberrant valuations in the small caps are addressed. The smalls will slow down, the larges will plug along, the VIX will continue to moderate, and blood pressure rates will decline into the holiday season. Is that really possible???
posted by John Borden at 10:10 AM
1 Comments:
NO!
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