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Decline - I am not a wholesale client

Investor optimism appears to be on the rise as economies have begun reopening around the world. Both fiscal and monetary stimulus have boosted valuations, and the second quarter saw a dramatic recovery in global equity markets. Though the S&P registered its best quarter since 1998, rebounding 39%, it still wasn’t quite enough to erase the first quarter’s pandemic-related 34% drawdown.


1 - YTD Drawdown


While the robustness of the rebound’s structural footing is up for debate, its leadership among mega-cap stocks is not. Capital concentration, a measure of how capital is distributed between stocks within an index, steadily increased (capital moved toward the larger-cap stocks) in the second quarter. This effect was especially prevalent in the U.S., where the S&P 500 is now at the 87th percentile of capital concentration – an extreme level based on the past 40 years. As seen in the figure below, this metric ebbs and flows over time, but does not tend to stay near historical extremes for too long.


2 - Capital Concentration - SP 500 Index
The increase in capital concentration has been especially substantial in large growth-oriented technology stocks. Technology’s weight in the Russell 1000 Growth Index has ballooned to an astonishing 44% with the latest reconstitution. This is nearly double the level seen in 2016, and a massive rise since the reclassification of Alphabet and Facebook to the communication services sector.


3 - Information Technology – Russell 1000 Growth Index
As you might expect by the increasing weight, technology has been the best-performing sector in the Russell 1000 Growth as well. Despite February and March’s substantial decline, tech has led this index to a nearly 10% return in the first half of 2020 – a truly astonishing figure in the midst of a global recession.


4 - YTD Best and Worst Performing Sectors
This narrow rally has rewarded narrow portfolios and challenged active managers who take a more diversified, risk-managed approach. But we see in our historical observations that we have been here before, and reversals can and do happen. While these effects may continue in the near term, we remain confident that the incremental value added from diversification and the benefits of controlling sector exposure and systematic risk will continue to pay off over time.

Dive Deeper

Beyond the increase in capital concentration we’ve just discussed, we’ve also seen both correlation and dispersion of returns increase substantially over the past year in U.S. and non-U.S. indexes. Check out the Intech Equity Market Stress Monitor® for an interactive look at how this and other indicators have moved over time – and what it means for market risk.

 

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