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With the Odds on Their Side, They Still Couldn’t Beat the Market


For the stock market, 2022 was a special year. If there was any year in which stock pickers should have been able to outperform the broad market indexes, 2022 was it, yet most still couldn’t beat the battered stock market.

That augurs poorly for active managers in 2023 because, so far at least, the odds have shifted.

Once again, consider “megacap” tech stocks, which had terrible performances last year — much worse than the S&P 500 as a whole. The S&P 500 is a capitalization-weighted index, which means that the most valuable stocks in the markets, like those from the big tech companies, have an outsize effect on stock market returns. When they decline, the overall index tends to decline. When they rise, the overall market tends to rise. Often the market moves in lock step, with many stocks heading in the same direction.

But last year, the monthly “dispersion” of the S&P 500, which measures “the magnitude of differences” in the returns of individual stocks in the index, was at its highest level since 2009. This means that there was more variation in stock returns, and most individual stocks did much better than the megacap stocks. You can see this by comparing the standard S&P 500 with an equal-weighted version, in which a stock like Dish Network, with a market capitalization of less than $5 billion, has the same weight as a colossus like Apple, with a market cap of well over $2 trillion.

In 2022, the equal-weighted S&P 500 outperformed the standard index by nearly seven percentage points. That implies that if you just picked stocks randomly last year, you should have done better than the overall index because the typical random stock did better than the megacaps and better than the S&P 500. But most active managers couldn’t do it.

Their chances are worse this year because the market so far has been very different. Megacap stocks have been outperforming the average stock in the S&P 500 index, and the equal-weighted version of the S&P 500 has been trailing the standard, cap-weighted index. That implies that if you just pick stocks randomly, odds are that you will trail the overall stock market this year.


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