It’s a big week: a Federal Reserve meeting, unemployment numbers and earnings for the biggest company in the S & P 500. Under “normal” circumstances an FOMC meeting would be the highlight of potential market-moving events, but this is not a normal week and these are not normal circumstances. We now have significant military conflicts in two regions, Europe and the Middle East, and a frosty relationship with China, a superpower expressing expansionist ambitions. Most equity investors will certainly have observed that the S & P 500 , the most cited benchmark of the largest U.S. listed companies, has now declined more than 10% from it’s high of the year in late July, but it is still up 8% ytd. So optimists might cite the past week’s GDP data (+4.9%) as a sign that despite the recent decline in the S & P 500, the U.S. economy is actually quite healthy. The problem is the S & P 500, as a barometer of economic health, much like Pollyanna, skews optimistic by nature of its design. It tracks the largest companies, and it is weighted by market capitalization. The more successful and larger a company becomes, the greater its impact on the value of the index. This is illustrated by the weights of its current largest constituents: Apple, Microsoft, Amazon, Nvidia, Alphabet, Meta Platforms, Berkshire Hathaway, Tesla, UnitedHealth and Eli Lilly & Co. Collectively these represent over 30% of the index. Of these, one could argue, only Berkshire as a conglomerate might indeed be an economic bellwether. The others hardly represent an appropriate yardstick to gauge the health and prospects of US businesses in general. Sentiment numbers don’t jive with the optimism of the GDP data, or the unemployment data, or S & P 500 ytd returns, so what might serve as a better yardstick? Perhaps for guidance we can look to the Russell 2000 index . By contrast to the S & P, the R2K tracks smaller, less well-known businesses. From within this group of companies I decided to look at the year-to-date performance of a subset. First I excluded biotech companies who, as a group, aren’t propelled to success or failure by the strength of the economy, but rather the quality of their specialized innovation. Among this sub-group of just under 1800 companies, only 34.3% are higher year-to-date. The average return for the Russell 2000 excluding biotech companies year-to-date is a decline of 11%. In fact a look at the performance of the index as measured by IWM (below) illustrates that it’s testing…
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