Last month, I was watching Brian on TV trying to make his case for stocks. Although he generally makes valid points he couldn’t answer one vital question:
If stocks are such a good investment why have stocks gone nowhere for the past 10 years? (Maria Bartiromo loves using this line and it drives me nuts).
I mean, yes when looking at the S&P 500 Total Return Index (with dividends) it appears if you were invested in the largest 500 stocks you have lost 10 years.
But that is not necessarily true. It again depends on what index you are looking at. The capitalization-weighted S&P 500 index is flat (as of end of April 2010) but the 10-year return for the equally-weighted S&P 500 index is up 83%!!!!!
A return of 83% in equities (equally-weighted S&P 500) vs. a return of 30% in Cash (90 day t-bills)!
If only the bulls knew how to make their case stick….
Brian Belski today called 2000-2010 the “dead decade.”
Brian should use a different yardstick. As I’ve mentioned before the market capitalization S&P 500 index is not a truly representative index of how stocks fared in the past decade.
One of many reasons is that the “big-foots” leave a larger footprint:
The beginning of 2000 found the 10 biggest stocks representing one-fourth of the S&P 500 Index. In the next 10 years these 10 stocks lost more than 50% of their market cap!
If ten stocks can have such a great impact on the performance of an index made up of 500 stocks…why not just use the Dow Jones Index instead? I believe the purpose for Brian referring to the S&P 500 index is to measure the performance of the 500 largest companies, not just 30 companies. So why is he still using the market-capitalization index and not the equally-weighted index?
I also don’t get why the market capitalization S&P 500 is still so widely used when the same company can have a greater impact as its market cap grows. i.e. Apple’s impact as of end of April, is 13 times what it was in April 2000. Same stock, much greater impact.
Lastly, when constructing a blended index of say large caps, mid caps, small caps, the industry standard is to rebalance on a frequent basis. If it’s useful for a hybrid benchmark index, shouldn’t it also be useful when constructing an index with market values ranging from $3 billion to $300 billion?!! The market capitalization index totally ignores this standard, whereas the equally-weighted index is rebalanced daily.