Image: Koshiro K/Shutterstock.com

Lyn Alden

Equity indices are finishing out a very strong November, with the S&P 500 roughly at all-time highs.

Here’s a 3-year weekly chart:


Market momentum remains intact at this time, with positive MACD (short term above longer term average).

As I wrote about last week, there have been a variety of sharp rotations under the surface. Since the vaccine announcements, highly-valued tech stocks that benefitted from the “work from home” movement have weakened, while cheaper value stocks, such as banks and oil producers and airports, have begun rallying on hopes of a return to relative normalcy sometime in 2021.

This chart shows the ratio of the equal-weight S&P 500 divided by normal market-weight S&P 500 (which the C Fund tracks). Whenever the line is going up, it means the equal-weight version is outperforming, and whenever the line is going down, it means the normal market-weight version is outperforming:

The normal version of the index is heavily concentrated into the big internet stocks like Apple, Microsoft, Amazon, Alphabet, and Facebook, because it invests a proportional amount into them based on their market capitalization, which is the value of the whole company. So, some stocks in the S&P 500 are weighted 20x or more as much in the index as other stocks.

The equal-weight version instead invests equally in all 500 stocks, and rebalances quarterly. So, 0.20% of the index is invested in each of the 500 stocks.


Over the very long run, the equal weight version has outperformed. It tends to outperform early in a business cycle, and underperform in the later stages of a business cycle. Big reversals tend to happen around recessions, because market leadership is rotating, where the previous leaders are often overvalued and new leaders emerge in the next cycle.

If we zoom in on the 1-year chart of this ratio, we can see that it does seem to be building a rising base, meaning the outperformance of the equal-weight version is becoming persistent:

What makes this challenging is that, because the market is more concentrated into the top 5 stocks than it normally is (we have to go back 20 years to find a similar level of concentration), that if the big market leaders don’t perform well, the broad index could be weak over a 3-5 year period even as many of the smaller stocks in the index do pretty well.

In general, maintaining a diversified portfolio helps mitigate the risk of multi-year stretches of poor performance. A combination of large stocks, small stocks, foreign stocks, and defensive assets like bonds, helps to reduce the probability of a long stretch of negative returns. Within other accounts, such as an IRA, investors can invest in additional asset classes such as emerging markets, precious metals, commodities, or digital assets, for a further degree of diversification.

TSP: Markets May Be Rotating; S Fund vs. C Fund

What it Takes to Be a TSP Millionaire

Mistakes to Avoid When You Retire from a Federal Job

Thinking about Retirement – High-3 and Leave Considerations

TSP Investors Handbook, New 7th Edition