over 3 years ago • 2 mins
The US stock market may look world-beating, but its reliance on a few big companies masks a significant shift: the average international stock now outperforms the average American one 😮
The US S&P 500 is at its highest level ever. But like most major stock market indexes, it’s “capitalization-weighted” or “market-value-weighted”; the more valuable a constituent company’s stock, the bigger the slice of the overall pie it represents.
There’s normally little difference between the performance of a capitalization-weighted index and its “equal-weighted” equivalent (where each stock is the same size slice). In recent months, however, a rush to buy tech shares has led to the very largest US stocks outperforming the rest. Indeed, Apple, Microsoft, Amazon, Facebook, and Alphabet alone now account for 24% of the value of the cap-weighted S&P 500.
This outperformance makes it look like the US stock market as a whole has done better than international equivalents. But the reality is somewhat different. On an equal-weighted basis, the S&P 500 hasn’t hit a new high since early June – while international stocks, as tracked by the MSCI All Country World Index excluding USA, have actually outperformed it across 2020 🤔
According to major brokerage Charles Schwab, the S&P 500’s dependence on a few big stocks may be a sign of vulnerability (as well as concentration risk). Previous instances of its cap-weighted and equal-weighted versions diverging to this extent have been a precursor to the former falling.
They also tend to coincide with the beginning of new economic cycles and changes in “market leadership” – where international stocks start outperforming US ones or vice versa. And while the S&P 500 has done better than the MSCI ACWI ex USA on a cap-weighted basis since the recession hit rock bottom in April, the opposite is true when you consider the performance of each index’s average stock. Across the whole of this year, meanwhile, the equal-weighted non-US index is 2.34% down – versus 2.89% for the equal-weighted S&P 500.
So while no one knows for sure when the cap-weighted S&P 500 will pull back, rebalancing your portfolio and expanding your exposure to international stocks via the likes of the* iShares* MSCI ACWI ex USA** **exchange-traded fund could be a forward-thinking move… 🧠
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