As the stock market (^DJI, ^IXIC, ^GSPC) shows signs of recovery after Big Tech’s worst performing day of the year, Paul Hickey, co-founder of Bespoke Investment Group, joins us on Market Domination Overtime to provide some insight into these market trends.
Hickey points out an important trend: Over the past six months, the S&P 500 Equal Weight Index (^SPXEW) has underperformed the standard S&P 500 (^GSPC) index by “one of the largest margins on record.”
“When you stretch that rubber band that far, it’s either going to snap or it’s going to snap back,” Hickey said of the tech-led rally, suggesting the market pullback seen this week could represent this “snapback” effect, a natural correction to the continued dominance of tech stocks.
Given these trends, Hickey sees opportunities for investors in small caps and smaller names included in the S&P 500. “Sometimes you want all the questions answered, but the last few days have been nothing like what we’ve seen in the past,” Hickey told Yahoo Finance.
For more expert insights and the latest market trends, click here to watch this entire episode of Market Domination Overtime.
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Video Transcript
U.S. stocks rebounded.
After the amazing seven had their worst day in almost a year.
The S&P 500 reclaimed the 50,600 level, notching a winning week as investors assessed big bank earnings, clung to hopes of interest rate cuts and kept a closer eye on market rotation.
Now we’re joined by Paul Hickey, co-founder of Bespoke Investment Group.
It was nice to meet you.
So this market continues to be interesting, Paul, what I’m watching is NVIDIA finishing the day higher, Paul, the tax is about 1.5%, but the small caps finish higher again, Paul.
So, as investors, Paul, how should we view this?
So, I think predicting what’s going to happen this week will be interesting to say the least.
Oh man, it’s been a really interesting week.
Well, you see, on Tuesday we saw some big moves at Apple.
Tesla has been rising for 11 consecutive days, and Apple, as of Wednesday, has been hitting new highs for seven consecutive days, and it looked like the Magnificent Seven band was rallying again.
But, you know, we have had days like Thursday when stocks have started to rise again and are approaching new highs, and I think part of that is, as I highlighted early last week, the S&P 500 Equal Weighted Index has underperformed the S&P 500 over the past six months by the largest margin in history.
Going back to 1990, there were only 10 or 11 days when the difference in performance between the A index and the equally weighted index was wide.
All of this took place between December 1999 and March 2000.
In other words, a rubber band can only be stretched so far that it either breaks or goes back to its original shape.
Well, I think that’s what we saw this week.
We are seeing reversion to the mean, with short-term moves being historically in the opposite direction, as is the long-term outperformance of cap weights.
Yesterday saw the S&P 500 underperform the Russell 2000 in a single day for the fourth time on record.
So we are seeing these movements.
Yeah, and, you know, they’re hard for investors to navigate.
But it’s one to watch, and we think that over the long term, smaller stocks within the S&P 500, or the smaller camps in the market as a whole, will do better.
Well, can you explain Paul’s rubber band analogy in more detail?
Nice to meet you. Will stress send you back to your old ways or cause you to develop binge eating symptoms?
So in other words, you know, we would expect some volatility not just in the overall major averages but also in the components as this kind of positioning plays out.
Well, as we all know, when you throw a big rock into the water, it tends to create even bigger waves in front of you.
But the craziest thing we’ve seen this week is the VIX is at 13.
Let’s look at periods when we’ve seen this kind of one-day performance divergence between large and small caps, or periods when the S&P 500 is weighted equally by market capitalization.
During all these events, the VIX rose above 20 and even as high as 70 at times.
Let’s look at the days I mentioned earlier where the S&P underperformed the Russell 2000 by as much as yesterday or more.
We’ve seen the ’87 crash, the COVID lows, and October 2008, and those three periods can’t be compared to where we are now, because the market is still near the highs.
Well, you know, sometimes you want answers for everything, but this is just one of those things that’s happened over the last few days that really doesn’t bear any similarity to anything we’ve seen in the past.
