Bigger Stocks Have Done Better

Bigger Stocks Have Done Better

over 3 years ago2 mins

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Bigger stocks delivered better returns in the first half of 2020 – and while the world weighs up the economic carnage, analysis of past patterns suggests the deeper the dip, the further stocks could have to rise… ✔️

What does this mean?

The S&P 500 index of the largest US stocks fell more than 20% in the first quarter of 2020 before rising 20% the next – a phenomenon unseen since 1932. Smaller stocks, however – as tracked by the S&P Midcap 400 and Smallcap 600 – haven’t fared so well.

But there are discrepancies within that. 85% of the Nasdaq 100 index – which includes, confusingly, the 103 largest stocks on the NASDAQ exchange – also features in the S&P 500. Yet an exchange-traded fund (ETF) tracking the Nasdaq 100 has massively outperformed the latter this year, with its 17% return trailing only US bond and gold ETFs.

“Total return” includes dividends and buybacks as well as stock movements (Source: Bespoke)
“Total return” includes dividends and buybacks as well as stock movements (Source: Bespoke)

As the chart above shows, however, not all big stocks have had it so good. The reason why the performance of the 30 members of the Dow Jones Industrial Average has been eclipsed by the Nasdaq 100's can be summed up in one word: tech. Four of the six fast-growing FAANGMstocks fail to feature. These stocks also account for 48% of the tech-heavy Nasdaq 100, compared to just 22% of the S&P 500 😳

Why should I care?

One key question for investors is whether the Nasdaq 100’s tech-led outperformance can continue its trend of the past few years. But those keen to keep exposure to a broader swathe of US companies will also wonder where the S&P 500 is headed next.

Investment research firm Leuthold thinks it has a clue. A comparison of US stocks’ recent rally to previous “bull markets” following similarly large drops of ~30% suggests the current situation isn’t that exceptional.

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1982 and 2009 may offer particular parallels. Interestingly, these were both cases where accompanying US recessions were particularly deep – but the potential for subsequent economic recovery was correspondingly strong 🤔

If the S&P 500 continues on this path, it could deliver 20% returns in the next 12 months – and even an average of the past four bull markets above would see a 14% total return in the coming year. A deep, brief recession may be no bad thing for big stock prices…

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