The head of the world’s largest index provider said that as market trends change, diversifying into smaller stocks is a “free lunch” for long-term investors.
After a period of focusing on the “big seven” mega-cap tech stocks, which rivaled the dot-com bubble of the 1990s, traders are taking advantage of developments in small-cap and defensive sectors, said Dan Draper, chief executive of S&P Dow Jones Indices. Diversify strategies.
Investors want to buy equally weighted stocks rather than buy market capitalization weighted stocks. S&P 500 Index he said, concentrating. Equal-weighted indexes give equal weight to each stock regardless of size, while market-cap-weighted indexes give greater weight to stocks with larger market capitalizations.
“(Equal weighting) gives you a tilt towards smaller, higher value, more defensive companies and building through that. We’re seeing (the shift) not only in cash equities markets, but also in derivatives The market is seeing this shift as well – now with futures contracts also, the E-Mini futures contracts are equally weighted,” Draper said.
“So now we’re starting to see this diversification… We saw in July, for example, that after the U.S. inflation data came out, small-cap stocks outperformed that month. You also saw some defensive Sectors are doing well, which gives you equal opportunity to really diversify and get away from this concentration.
Investors are experiencing wild swings in global stock markets in August, changing expectations for a rate cut from the Federal Reserve on recession fears, and the unwinding of yen carry trades that are having an impact on other assets — all in a market prone to Occurs during fluctuating months.
“When you look at the underlying cyclical changes in interest rates, the U.S. and obviously Japan in the other direction, you start to see money flowing. But mean reversion is really critical,” Draper said.
Mean reversion occurs when an asset returns to its long-term historical mean after significant volatility.
“If you’re a long-term investor, diversification is your free lunch and being able to become more defensive, or maybe interest rate sensitive… you start to see those factors that are really lagging,” he said.
Many market participants have pointed to potential opportunities in small and mid-cap stocks as broader market forces shift.
“The likelihood of a recession (in the U.S.) has increased… By the time a recession is declared, it tends to be complete, and typically small and mid-cap stocks do well,” said Craig Johnson, chief market technician at Piper Sandler. four told CNBC’s “Worldwide Exchange.”
“I think it’s very appropriate for the Fed to cut interest rates in September. I think now is the time to take a hard look at small and mid-cap stocks,” he added.
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