After a dismal 2022 marked by excessive inflation and an aggressive increase in interest rates, there were hopes that the economy and stock market would recover without falling off a cliff. Economic data has been mixed. The job market is weakening but still quite strong. Prices are coming down, but not fast enough (and in some cases going up). And then there’s the 2023 stock market, which is not actually higher.
Why the 2023 stock market is not higher
A handful of stocks are having a great year. The FANG names, Tesla, Microsoft, and NVIDIA are sporting huge gains. But everyone else is gasping for air. These mega-cap stocks are the reason that the Nasdaq 100 is showing a YTD gain of 33% and the S&P 500 is enjoying double digit returns. Both indices are skewed, because they are cap-weighted indices. As a result, the biggest names by market cap have the biggest influence.
If you look at equal-weighted performance, the 2023 stock market is telling a much different story than the headlines.
In an equal-weighted index, a name like Apple (with a massive market cap) has the same vote as the much smaller cap AirBnB. This method is ideal as it tells us how the overall market is doing.
The RSP, or the equal-weighted S&P 500, is down about 2% on the year. The Russell 2K, which gives equal weight to a large sampling of small cap stocks, is also down 2% on the year. The Dow Industrials Index, which is a price-weighted index, is roughly flat in 2023.
The only index showing a strong return on an equal-weighted basis is the Nasdaq. It is actually up 15%, not the 33% that is heralded in the financial media.
Let’s look how these returns compare to the returns on bonds. Most treasuries, which are relatively safe, are providing an annual return of 5-6%.
Equal-weighted indices level the playing field
Equal-weighted indices are a better representation of performance relative to what is happening in the economy and across various sectors. They also help us understand if the economy is doing well across groups or concentrated in a few areas.
Just because the media chooses to focus on the headline data does not always make them right. The 2023 stock market is mostly down – but there is time to recover. Watch the equal-weighted indices for clues as to what’s really happening.
