The Heavy Lifting

Wall Street and Main Street are two different zip codes. In 2020, one neighborhood struggled with rising economic uncertainty, while the other posted strong gains underscored by a loose fiscal and monetary environment. In 2021, we expect the neighborhood's economic fortunes to converge.

For most of 2020, strong gains from the largest stocks in the popular benchmark US indexes overshadowed the majority of the market. Until the end of the third quarter, the economic insecurity seen on Main Street weighed on 99% of the companies in the S&P 500, while the top 1% carried the index higher. This divergence is obscured due to the index’s market capitalization weighting construction.

The effect that the ‘largest-of-the-large’ had on performance is evident when comparing the returns of the S&P 500 Index to its equally-weighted version. Through the end of the third quarter, the 5 top holdings rose an average of nearly 40% year-to-date, dragging the overall index higher while masking lackluster performance elsewhere. However, once positive vaccine news flow grew (culminating in emergency authorizations globally), the broader market did the heaving lifting. During the fourth quarter, the ‘other’ 495 stocks in the S&P have outperformed the top 5 holdings, and fueled the outperformance of the Equal-Weighted Index relative to its cap-weighted version.

As we move into 2021, broader participation from US companies bodes well for both Wall Street and Main Street. The stock market is a forward-looking discounting mechanism that is essentially pricing in a return to economic normalcy. While the 2020 stock market success was initially propelled by large-cap growth companies likely to weather the Coronavirus pandemic, the market is indicating that a more normalized economy is returning.

Heavy Lifting Weighting Effect on Performance

Certain sectors at the epicenter of the pandemic destruction, such as airlines, cruise lines, and entertainment stocks might take longer to recover, yet a dissipation of the economic uncertainty will help the broader economy. This return of cyclicality should also spread to other areas of the market, which have lagged in the Covid economy, such as financials and value stocks.