by ConfidenceFairy
Compare these two indexes that track the same index. One uses market cap, the other is equally weighted.
- S&P 500 -8.52% YTD
- S&P 500 Equal Weight Index (EWI) -16.68% YTD
Summary: Composition of stocks market changed after initial market drop. Those companies that do well in pandemic are already large and move the whole (market cap weighted) index up. Many other companies stay down and can go even bankcrupt.
(And they say that passive indexing removes infomation from the market. It’s not doing it yet)
This insight is provided to you by NPR www.npr.org/2020/05/22/861331371/stocks-are-up-but-the-economys-down
… when the coronavirus pandemic started forcing the U.S. economy to shut down in late February, the stock market tanked for the next month. By late March, it was down 34%. But then, even though the economy has kept getting worse and worse, the U.S. stock market has started to recover. It rebounded in a big way so that now it is only down 13% from where it was in February before the recession started. … And meanwhile, millions of workers keep losing their jobs each week.
… the stock market did beat the real economy to what was happening, and it reprised really quickly. And then all of a sudden, it became a battle of the composition of the stock markets.
… the whole stock market collapsed when coronavirus started hurting the U.S. economy, but then some stocks of companies started recovering even as others continued to struggle.
… it just so happens that the companies that are the best positioned for the environment we find ourselves in and what we will find ourselves in over the next six months to a year, the companies that are best positioned happen to already be the largest weighted components of the indices.
… companies like Facebook, Amazon, Microsoft, Apple and Alphabet, a.k.a. Google – are also some of the most valuable companies in the country. In fact, just those five companies make up about 20% of the entire S&P 500 … when those five stocks do well, they can help pull up the whole index.
… First markets dropped in panic sell. Then companies who don’t suffer from the pandemic recovered and the composition of index changed. Big tech companies happen to be already large part of market cap of SP500, so they bring up the SP500 as a whole.
… aside from Amazon, which has almost a million workers, a lot of these companies don’t actually employ that many people. Microsoft only has 144,000 workers. Facebook has just 48,000 workers. And this can partly explain why tens of millions of people can lose their jobs while the stock market keeps going up.
… not all companies are the same. Some big ones are doing fine, pulling up the stock market. Others are struggling, possibly going bankrupt, laying off workers.