The S&P 500 index is capitalization-weighted. That means, the big companies have much more influence on the performance than the smaller ones. Also the “S&P 500 Equal Weighted” index exists. In this, all stocks have the same proportion. The Russell 2000 index tracks US small-cap stocks. (Modest size companies, with small market value, capitalization.) Both the “S&P 500 Equal Weighted” and the Russel 2000 lag far behind the large tech-stars in the FANG+ Index. The gap between the indices is very large, almost 40 percent. It’s between plus 20 and minus 19 percent this year. 

The K-Shaped Recovery

Recessions have shapes. The V-shape recovery is a quick and huge fall in the economy, and a similar, fast restoration. Many people on Earth are praying for this now. The U-shape means something similar, but with a longer bottom and later recovery. Yesterday, I have heard about something new, the K-shaped recovery. Not even mentioned on the Wikipedia page about recession shapes.

The K-shape means, after a strong fall, some will go out of the pit, but others will continue to slide down. (The upper leg of the K is the winners, the lower leg is the losers.) Something similar can be observed in the stock market, with the FANG+ stocks up and the small caps behind. I hope the same can we avoid in society and the crisis will not lead to greater poverty in the long run.

In the last 10-15 years, but perhaps even for longer, one of the best investment strategies was to buy an index. Mostly, in the form of a low-cost equity index fund, an ETF. Now, however, we can expect a very different performance from different stocks. The choice between stocks, sectors, countries has become very important. The “buy the main index and hold it for 10-20 years” strategy seems to be obsolete.