How Equity Market Leadership Reversed Course in 2020

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Published on January 31, 2021

| 4 min read

Richard Yasenchak, CFA, Head of Client Portfolio Management


While equity markets continued to seek record closes through the end of 2020 backed by historical levels of monetary and fiscal stimulus, real economic worries and signs of strain in the market persist. In this blog, we’ll examine some of the more noteworthy market trends we saw, including the initial narrow leadership, a stark reversal to broader participation to end the year, and the historical extremes in a couple of key market metrics that remain.

Video CommmentaryEquity markets experienced a drawdown of over 30% at the beginning of the year but quickly recovered, with the U.S. equity markets reaching new highs by year-end.

Despite the substantial drawdown, high beta stocks did exceptionally well in 2020. The highest beta stocks in the top quantile substantially outperformed low beta stocks in the bottom quintiles. The outperformance of high beta stocks in U.S. and global markets created a challenging environment for defensive strategies.


f1 - index returns by beta

In 2020, equity markets were dominated by a broad-based advance with very narrow relative leadership in market capitalization, sector performance, and style performance, resulting in substantially different performance drivers during the last four months of the year from the prior eight months.

First, capital concentration increased in U.S. equity markets, driven by the mega-cap technology stocks’ strong performance during the year despite a reversal over the last four months. We are now at the highest levels of capital concentration in over three decades for U.S. equity indexes.


f2 - weight of top 10 stocks by market cap

Secondly, the S&P 500 Index versus the S&P Equal-Weighted Index indicates narrow sector leadership despite a strong reversal and broadening participation in the final months. In the figure below, the blue bars represent the first eight months of sector performance, and the yellow bars are the last four months of sector performance between cap-weighted and equal-weighted counterparts. Driven by dominance in larger-cap consumer discretionary and technology stocks, the cap-weighted index outperformed an equal-weighted index of the same stocks in the first eight months. But smaller-cap stocks led in the final four months as 9 of 11 equal-weighted sectors outperformed their cap-weighted counterparts.


f3 - sector returns


Thirdly, while U.S. growth-oriented stocks strongly outperformed value-oriented stocks for the year, the trend reversed during the last four months of the year. In the figure below, the red bar illustrates growth stocks, and the yellow bar is value stocks. For the first eight months and full year, growth stocks strongly outperformed value stocks. However, the reversal in the final four months of the year did benefit value stocks.


f4 - Russell style index returns


We don’t know if high beta stocks will continue to rally or if these reversals across capitalization, sectors, and style will continue into 2021. We know that several risk metrics in the Intech Equity Market Stress Monitor® are stressed, including capital concentration, which portends reversals across cap-weighted equity indexes but performance tailwinds for smaller-cap stocks or equal-weighted indexes.


f5 - capital concentration


There is also an increasing systematic risk across all developed and emerging markets equity indexes, given very high levels in the correlation of returns.


F6 - correlation of returns

In summary, global equity markets had rallied substantially from the lows in 2020. It’s unclear if markets will remain strong and if relative performance will broaden or remain concentrated in mega-cap growth stocks. Yet, equity index risk is rising because of market concentration and correlation of returns. Investors should plan accordingly along various risk dimensions to protect from abrupt market reversals and heightened volatility.

Explore the Monitor

Want to dig deeper into today’s unique market structure relative to significant market events of the past? Compare the state of today’s markets with decades of history in our interactive Intech Equity Market Stress Monitor®, which offers five market risk indicators and 21 global and regional equity benchmarks to explore.


The information expressed herein is subject to change based on market and other conditions. The views presented are for general informational purposes only and are not intended as investment advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation, or sponsorship of any company, security, advisory service, or fund nor do they purport to address the financial objectives or specific investment needs of any individual reader, investor, or organization. This information should not be used as the sole basis for investment decisions. All content is presented by the date(s) published or indicated only, and may be superseded by subsequent market events or other reasons. Past performance is no guarantee of future results. Investing involves risk, including possible loss of principal and fluctuation of value. Information that is based on past results or observations is not necessarily a guide to future results, and no representation or warranty, express or implied, is made regarding future results.