The equal weighted index has also underperformed the market cap weighted index for more or less the past two years. This has largely been driven by the success of the Magnificent 7, including NVIDIA (NVDA), as the AI theme became more prominent.
In recent months, however, the two versions of the index have moved more or less in tandem, as can be seen in the chart above.
We highlight the breakdown in the relationship between the two versions of the index to underscore the point that many high quality stocks have lost significant ground in December.
As of the close of trading today, the average stock in the S&P 500 is down approximately 7% in December. The average stock in the S&P 500 has also retreated all the way back to mid-September levels.
The key point is that certain mega-cap star performers in recent weeks are masking much broader weakness in share prices.
What was the Fed’s message?
The irony of today’s sell-off is that Jerome Powell’s message was actually quite optimistic.
Labor markets have cooled, in his opinion, to the point where they are no longer generating inflationary pressure. At the same time, he notes we are not seeing substantial layoffs, just a slower pace of hiring.
While inflation indicators remain somewhat elevated versus the 2% target, many of the stickier components within the inflation basket are lagging indicators that reflect economic conditions six to twelve months ago, rather than the current moment.
We would potentially be more concerned if long-term interest rates were spiking, but that is not the case. Long-term inflation expectations are also stable.
Put differently, the market is not signaling any meaningful shift in either the growth or inflation outlook.
Growth drivers intact
While Wall Street traders are always looking for rate cuts, what really matters is that we have a strong, stable and growing economy.
The potential for Trump to deliver real economic growth—by fostering innovation and investment—is in fact one of the reasons more aggressive rate cuts are looking increasingly less necessary.
Notwithstanding today’s sell-off, the S&P 500 has still delivered exceptional results year to date, up about 25%.
Stock market volatility often picks up towards the end of the year. Christmas Day is next Wednesday. Much of Wall Street is getting ready for vacation.
The trading year is effectively wrapping up this week. We suspect some technical factors are at play here with market participants locking in gains and going to cash. Nearly all asset classes sold off today.
Low interest rates help prop up asset prices, but the most important and dependable driver of stock market performance is economic growth.
Year end volatility has erased gains registered by many high quality names since the election.
While many folks within the investment management industry seem to be moving to cash in advance of their ski trips, long-term individual investors may want to view the poor performance of so many stocks in December as an early Christmas present.
