Market Insights: Market Commentary - Small Cap vs. Large Cap: Might is Right ... for now

Milestone Wealth Management Ltd. - Aug 28, 2020
Macroeconomic and market developments North American equity markets were positive this week, with Canada up ~1%; in the US, the S&P500 and Dow both positive by ~2%. The price of US oil was up this week, with West Texas Intermediate crude trading at

Macroeconomic and market developments

  • North American equity markets were positive this week, with Canada up ~1%; in the US, the S&P500 and Dow both positive by ~2%.
  • The price of US oil was up this week, with West Texas Intermediate crude trading at $43, however in Canada, the Western Canadian Select price stayed flat at $30.
  • The Canadian dollar was up, going from 75.8 cents last Friday to 76.3 this Friday.
  • Gold was also positive, trading at $1,971, up from $1,946 last Friday.
  • In Canada, Erin O'Toole was elected the new Conservative Party Leader. Headlines focused on opposition party prospects for taking on Trudeau's Liberal government in a possible fall election.
  • Jason Kenney’s Alberta provincial government released its financial update on Thursday projecting a 2020 budget deficit of over $24B. The figures “are incredibly sobering” and “predict a grim reality for Albertans,” said Finance Minister Travis Toews, who hinted that further cuts to government services could be in store.
  • Canadian banks were on deck to report quarterly earnings this week, which generally surprised to the positive.
  • The Dow Jones Industrial Average made some changes to its 30 stock index this week.  Please see our charts below for an in depth analysis.
  • Whereas last week saw the Democrats holding their Democratic National Convention, this week was the Republican’s turn holding their Republican National Convention.  The GOP formally re-nominated Donald Trump and VP Mike Pence to run for a second term. Trump announced that if re-elected, he will slap tariffs on any company that leaves the United States to create jobs elsewhere.
  • The number of confirmed COVID-19 cases continued to increase this week.  Total global cases are now approaching 25 million; the death toll now sits at roughly 840,000.  The US continues to lead, with over 6.05 million cases and just over 185,000 deaths. Brazil is at roughly 3.78 million and India at roughly 3.45 million cases.
  • For a deeper COVID dive, the US investment company First Trust has put out a US COVID-19 Tracker:  here 

Charts of the week

We continue to see great disparity between the performance of the mainstream S&P 500 Index which is market-weighted versus the S&P 500 Equal Weight Index where each component forms an equal weight. The primary reason for this is strong performance of a few mega cap tech companies which are becoming a larger proportion of the index based on market capitalisation. The S&P 500 Index is up approximately 8% YTD while the S&P 500 Equal Weight Index is down 3.5% for a spread of 11.5% which is as high as it has ever been. Clearly, the overall U.S. equity market has not been as healthy as the mainstream index would indicate, and due to this the S&P 500 Index is becoming less of an appropriate indicator. If we look at alternative indices, the long-standing Dow Jones Industrial Average is roughly flat this year and the NYSE Composite is down about 6%.  

This line bar chart shows the performance at a glance for every one of the 500 stocks in the Index. The grey area on the left is the 50 largest stocks and the grey area on the right the 50 smallest stocks in the S&P 500. The numbers in green and red at the top are the year-to-date performance numbers, with the white area in between the other 400 stocks. This is a great representation of the incredible disparity we are seeing in the U.S. stock market this year.


Looking at it another way, the chart below is year-to-date performance of the rolling 50-stock average in the S&P 500. As you move from left to right, you can visually see this disparity across the U.S. market cap spectrum.

  We also wanted to highlight that the S&P, the firm responsible for maintaining the composition of the Dow Jones Industrial Average (DJIA), announced the most significant reshuffling of the index since 2013 which will take place on August 31st. (CRM) will replace Exxon Mobil (XOM), Amgen (AMGN) will replace Pfizer (PFE), and Honeywell (HON) will replace Raytheon (RTX). This change also coincides with the announced Apple (AAPL) 4-for-1 stock split. This is noteworthy, because unlike the S&P 500 which is market-weighted, the DJIA is price-weighted, so this reduction in price per share for Apple has a significant effect. Although this six-stock change is the biggest in seven years, it is actually the change in the price of Apple that will have the greatest impact on the Average. Because the DJIA is weighted by each company's share price, once AAPL's split becomes effective, its weight in the index will drop from just over 12% down to 3%.

This is an interesting shift because so far this year AAPL's 71% gain has had a positive impact on the DJIA of 1,455 points. After the stock splits, AAPL's total weight in the index will only be 3%, or the equivalent of 846 points. Stock splits may be meaningless in terms of a company's fundamentals, but for a price-weighted index like the DJIA, they can have a large impact! Besides the AAPL split, the other notable aspect of the index reshuffling is that the average share prices of the stocks going into the index are four times higher than the ones going out. As a result, AMGN will go into the index with the third-highest weighting, CRM will have the fifth-highest weighting and HON will be the ninth highest-weighted component. Here is a summary of the changes in the sector weightings of the index. You will see the drastic changes to technology (down) and health care (up), each moving about 4.5% in either direction, as well as a 2% increase to industrials.


Sources: Bespoke Investment Group LLC,,  Globe and Mail,,,, Canaccord Genuity, Financial Post, Calgary Herald, First Trust Portfolios L.P.