Positioning For A Broader Rally

Chart, Trading, Courses, Forex, Analysis

Tobias Levkovich, Citigroup’s chief U.S. equity strategist, was cited late last year with a year-end 2021 S&P 500 price target of 3800. At the time, that made for a 2% price return on the Index—it sits at about 3950 as of today.

Contrary to what this headline S&P 500 price target might imply, Levkovich’s outlook for the economy and for stocks broadly was not dire. But the concentration of the S&P 500 in a handful of names—which powered its strong returns in 2020—would be a drag on the Index in a broader rally of smaller stocks: 

“(I)t’s easier to pull a dog sled with Huskies than with Chihuahuas. The megacap tech companies are the Huskies, but that’s not where the real improvement in trend will be. It will be in the smaller, cyclical Chihuahuas. They’ll just have a harder time pulling the S&P 500 dog sled."1  

To get a sense of the concentration in the Index, below is a chart on the Herfindahl-Hirschman Index (HHI) for the market cap-weighted S&P 500 relative to its equal-weighted version. 

The HHI indicates that the S&P 500 Index is far more concentrated today than at any time over the past 30 years. Its equal-weight version—where each stock receives a 20-basis-point weight at quarterly rebalance—by design has roughly the same level of diversification at all times.

Herfindahl-Hirschman Index 

Figure 1_Herfindahl-Hirschman Index

The market cap-weighted Index has been on a historic run of late. The S&P 500 has beaten its equal-weighted version each of the past four years. 

But perhaps for the first time since 2016, there seems to be momentum building for the equal-weighted Index. 

Returns Since September 2, 2020

Figure 2_returns since 9.2.20

And for those who think this outperformance will merely run out of steam, recall what happened 20 years ago, in March 2000, when the HHI on the S&P 500 previously peaked at 124. 

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