HOW THE OTHER 99% Lives
Building on solid year-to-date gains, TCM strategies all performed well in July as the VIX marketplace sent a clearer message of normalization throughout the month. With stocks now positive on the year despite a stunning -32.9% annualized contraction of the economy in Q2 (more on this below), it is perhaps little wonder why the VIX remains stubbornly elevated and yet to trade below 20 since mid-February.
Due in large part to the popular market-cap weighting methodology, the gap between equity index performance and economic reality continues to widen. As smaller “brick and mortar” companies shrink in the face of the worst fundamentals in decades (23 retail bankruptcies this year alone), a handful of mega-cap tech names have seen valuations explode due to their perceived immunity to the economic shutdown. As a result, indexes have become increasingly concentrated. Indeed, the 5 largest names in the S&P 500 (all tech) now represent a record 23% of the index and have accounted for substantially all of the S&P 500’s return in 2020 and over the past decade (see images below).
Like it or not, the fate of the market now rests largely on these 5 names. For now, indexes are content to ride their coattails higher, but it remains to be seen how long the struggle of the other 99% can be swept under the rug. Entering the worst seasonal period for stocks with these mega-cap tech names facing increasing antitrust pressure and less than 100 days from a pivotal presidential election, a return to normal volatility may still be a ways off.
