Coincidence: The S&P 500 closed at exact same level on October 3, 2011 as it did October 3, 2008. The odds of this occurring are very low. I roughly estimated the odds at about 1 in 20,000 in my head. I did not spend the time to look at the data, but I would be surprised if this has ever happened before.
Market Cap Weighted Indices: I have been looking more at this year’s gap between the performance of the broadly used indices, which are market cap weighted, and the performance of stocks in general. Most people believe the returns on the indices they follow represent a broad reflection of the stocks contained within those indices. This is not the case. We equal weighted the 2,500 largest publicly traded companies and created an index. Year-to-date, that index is down about 25 percent, suggesting the typical stock has performed significantly worse than the S&P 500 or other indices would suggest.
To illustrate this point, we have created a random portfolio of nine random stocks (we made it truly random with a random number generator), and Apple, which is the largest (or on some days the second largest to Exxon) market cap stock in the U.S. We looked at the portfolio in two ways. First, we looked at an equal weighted portfolio, which, as you can see performed similarly to stocks as a whole. Conversely, in the market cap weighted portfolio, Apple had a huge influence, completely skewing the performance of the portfolio. In “real life”, investors and investment managers would be more likely to roughly equal weight a portfolio than they would to market cap weight a portfolio. As you can see, there is a dramatic difference in the implied risk and return of the two portfolios.
So, when investors compare their funds to the market indices, it is not always an accurate comparison. It is good to be aware that the indices may not be reflective of typical stock returns. Currently, it is skewed toward the indices looking better than typical stocks. Many times it works in the other direction, making it seem like managers are outperforming the market, when they are really just performing in-line with typical stock performance.
Market Today: The market was strong today, for the second day in a row. Confidence that Europe will act to contain the crisis and positive economic news helped stocks today. Since 3:15 yesterday, the S&P 500 has jumped 6% and the Russell 2000 has increased 8.5%.
S&P 500 (1.5 days)
Russell 2000 (1.5 days)
Have a good day! Brent
