On a rolling three-year return basis, the OEX has outperformed the SPXEWI by more than 50% for the first time since 1999.
The outperformance from the names at the top of the S&P 500 Index is an industry-wide talking point. The hefty concentration of a few names in the primary market benchmark leaves investors wary from a risk standpoint, but many must juggle the need to keep up with the market or else face losing clients. With that said, it’s great to have some numbers and talking points in mind when these conversations inevitably come up. While historical comparisons are not perfect, they can help contextualize current market movements that feel unprecedented, just like the cap-weight dominance does today. However, we have seen this before if we compare the S&P 100 Index (OEX) against the S&P 500 Equal Weight Index (SPXEWI). On a rolling three-year return basis, the OEX has outperformed the SPXEWI by more than 50% which seems otherworldly. This gets more extreme if the S&P 500 Top 10 Index was used, but the limited history makes the OEX a better proxy for mega-cap names. Nonetheless, we can see in the image below that the only comparable period is the late 1990s.
The first thing that comes to mind when people hear that it’s just like 1999 is the tech bubble bursting soon after. While that is true, it’s difficult to make calls with such limited assumptions. One thing to keep in mind is that the first time OEX had outperformed SPXEWI by more than 50% in a three-year period was January 1999. It took another 13 months before the peak value of 73.34% was hit in March 2000. While things seem crazy right now, they can get crazier. In any case, what’s important is having a process that can deal with either the continuation of the current trend or the emergence of a new one. Until we see evidence of a new trend, it’s against our process to make changes on what should or could happen in the future. At the same time, understanding the lay of the land with respect to market environment can help with conversations with clients and preparedness for when that environment inevitably changes.
