Over the last three years, the S&P 500 Index ([SPX]) has beaten the S&P 500 Equal Weight Index ([SPXEWI]) by more than 40% on a cumulative return basis for the first time since the 1999/2000 market.
As we talked about in Monday’s feature (click here), there are plenty of correlations between today’s market and that of the late 1990s. Other than valuations being elevated as they were in the late 90s, we’ve also seen an extremely strong run from the cap-weighted indices relative to their equal-weighted counterparts, particularly in the large cap space. Over the last three years, the S&P 500 Index (SPX) has beaten the S&P 500 Equal Weight Index (SPXEWI) by more than 40% on a cumulative return basis for the first time since the 1999/2000 market. Unfortunately, our data set only goes back to 1990, so it’s easy to get infatuated with mapping over to the tech bubble era. While we do see similar levels of outperformance by the SPX against the SPXEWI on a relatively long-term basis, we first saw the three-year performance spread hit 40% in January 1999. There was still another 15 months until the cap-weight began to abate.
One of the great features of the updated charts on NDW is being able to select a specific period on a chart. Instead of looking at the SPX in the late 1990s, let’s see if there’s any key differences between January 1996 – January 1999 period (the first point in which SPX outperformed the SPXEWI by 40% in the tech bubble era) vs the last three years when looking at price action for the SPXEWI. Before digging into the charts, the performance of the SPXEWI over each of those periods is quite a bit different. The SPXEWI from 1/26/1996 – 1/26/1999 was 62.50% (the SPX was up 101.46%) while over the last three years the index was up a more modest 35.44% (the SPX was up 76.64%). There is less of a big run today versus the late 1990s.
When looking at the charts from today versus the late 1990s, the stronger performance in the early years of the 90s three-year lookback is evident. There is one interesting similarity between today and the late 90s, a quick and violent sell-off in the later years of our lookback periods. In the 1990s it was Long Term Capital Management blowing up due to Russia’s default on its debt and recently it was the Tariff Tantrum that led to the market selloffs. However, following both selloffs the market was able to recover to make new ATHs not too long thereafter. As it stands today, the magnitude of outperformance by the SPX against the SPXEWI is a concern on longer time frames, but it does not mean collapse is imminent. While the SPXEWI is lagging on a relative basis, the absolute picture is fairly strong which doesn’t give us much to be overly concerned about. One key point to keep in mind is that the SPXEWI didn’t start to show cracks until mid-1999 following a blow-off top move which was a harbinger of what was to happen early in the next year. Until we start to see absolute technical evidence of weakness, the trend remains upwards.
