Today’s Barbelled Market Performance Has Only Occurred in 15% of the Months—and It Hasn’t Gone

Today’s market is barbelled regarding company size, with the mega-cap Tech stocks and the S&P 600 Small Cap index both outperforming the middle of the S&P 500.

Over the past twenty-five years, this particular type of environment has only occurred in 15% of the months, and it did not play out well in past cycles, surfacing near the end of both the 2000 and 2007 market tops.

The S&P 500 Equal Weighted index and the S&P 600 Small Cap index are two ways to measure the small company factor and, although they differ in design and risk, their performance has been remarkably similar.

Today’s Barbelled Size Factor

The relative performance of small cap stocks is an important indicator of business fundamentals and market sentiment. We’ve recently noticed that the market has been sending mixed messages about size. Intrigued by these contrary signals, our curiosity prompted a closer look at the all-important size factor.

On one hand, the capitalization-weighted S&P 500 has been outperforming the equal-weighted version. The Social/Mobile/Cloud giants have been powering the market in 2018 suggesting that ‘Large’ is in charge.

On the other hand, the S&P 600 Small Cap index is trouncing the S&P 500. Small Caps are favorably positioned because of their focus on the domestic economy, greater benefits from tax cuts, and higher sensitivity to a strong business cycle, suggesting that ‘Small’ is the place to be.

Capitalization-weighted indexes will outperform their equal-weighted counterparts when Large Caps are winning, and the equal-weighted version will dominate when the rank-and-file stock is beating the mega caps. Many investors watch this relationship as a straightforward indicator of the size factor; since both renditions of the index own the exact same names the only difference is the influence of market cap. Comparing the S&P 500 to the S&P 600 (or Russell 2000) is another way to track the size factor but this relationship involves two completely different groups of companies and sets of sector weights, requiring an additional layer of analysis to sort out the main drivers of relative returns.