Research.LeutholdGroup

Despite a resurgence in Small Cap stocks and Commodities, it still feels like an “S&P 500 World” for asset allocators. The financial media remain obsessed with S&P 500 targets, S&P 500 earnings, and S&P 500 stocks. And why wouldn’t they be?

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Dividends are a cornerstone of equity investing and, over the decades, they have produced a significant portion of the stock market’s total return. Previous Leuthold research has identified a strong dividend influence on total returns for small and mid-caps; a client recently asked if we found the same effect in the universe of S&P 500 companies. Specifically, have S&P 500 dividend-payers outperformed non-payers, and, second, have dividend growers outperformed non-growers?

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With May Day marches and demonstrations cancelled, the workers of the world have one less opportunity to remind us of the ever-widening wealth gap and the evils of the “Top 1%.” It’s a shame, because this was the year that we active managers would have stood shoulder to shoulder with those protesters voicing our own contempt for the “Top 1%”… of the S&P 500.

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While the FANGs—and, lately, the Dow stocks—are the market’s undisputed leaders, it’s difficult to argue the market has narrowed in a fashion that’s indicative of a “distribution” phase.

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We shouldn’t bite the hand that feeds us, but it’s easy to lie with charts.

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Based on a median of six measures, today’s S&P 500 valuation profile equates to the one prevailing on August 31, 1997. From there, the S&P 500 rallied >60% over the next 2 1/2 years before peaking. However, the same can’t be said of valuation readings for the “typical” or median stock.

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September was very unkind to smaller firms.

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The S&P 500 couldn’t hang on to its gains and snapped a five month winning streak in July. This is only the third down month in the last year.

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As the market found a new leg higher the last two weeks of May, the Cap Weighted and Equal Weighted S&P 500 Indexes had uniform advances—just over 2% for the month. The Equal Weighted Index maintains an 80 bps lead YTD.

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Market Cap has been slightly better than equal the past two months.

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Cap Weighted Slightly Better In Flat Performance Month.

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The Equal Weighted Index has outperformed the Cap Weighted Index in seven of the last nine months.

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For 2013, the Equal Weighted Index bested the Cap Weighted Index by 4%. The Equal Weighted Index has outperformed the Cap Weighted Index in four of the past five years.

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The Cap Weighted S&P 500 (+4.5%) slightly outperformed the S&P 500 Equal Weighted (+4.2%) during October. YTD, the spread between these two indices remains wide, with the Equal Weighted index outperforming by 4.2%.

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On a YTD basis, the spread between these two indices continues to expand, with the Equal Weighted index now outperforming by more than 4%.  Consumer Staples is the most expensive sector among Large and Mid Caps, while Health Care is most expensive in Small Caps.

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The Equal Weighted S&P 500 (+5.4%) outperformed the Cap Weighted S&P 500 (+4.9%) and also continues to outperform on a YTD basis.

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In 2006, the capitalization weighted S&P 500 was up 13.6%, excluding dividends. The average return for the 500 stocks (S&P equally weighted) was up 14.2%.

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Many of the questions in this month’s issue came from January client meetings in Texas.

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Poor performance by Large cap technology issues had a very negative impact on S&P 500 cap weighted performers in 2000.

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If small caps can move back above the October 1999 level in the coming months, this would certainly be encouraging for small cap fans and may even signal a change in the trend to confirm that leadership is indeed moving to the small cap arena.

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It will happen again! Relative overweights in small caps will be an advantage instead of disadvantage to portfolio managers. Small caps can grow earnings faster.

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