The ratio in the chart above divides the MSCI USA index by the MSCI USA Equal Weighted index. This ratio indicates how larger companies (with higher market capitalizations) are performing relative to the broader market. Market capitalization, often referred to as "market cap," is a measure of a company's total value as determined by the stock market. It is calculated by multiplying the current market price of a company's shares by the total number of outstanding shares. A rising ratio indicates that larger companies are outperforming the broader market, showcasing a market largely driven by its biggest constituents. In contrast, a falling ratio suggests that smaller companies are performing better relative to larger ones, indicating a more evenly distributed market strength and a shift away from the dominance of large-cap stocks.
Over the long-term, the ratio has been falling and only peaked at the end of prolonged bull markets, indicating that a capitalization weighted approach underperformed the equal weighted portfolio.
The MSCI USA index is designed to measure the performance of the large and mid-cap segments of the U.S. market. It covers approximately 85% of the free float-adjusted market capitalization in the United States. The MSCI USA index is market-capitalization-weighted, meaning bigger companies with larger market capitalizations exert more influence on the index's performance.
Conversely, the MSCI USA Equal Weighted index assigns equal weight to each company, regardless of its market size. This equal weighting approach ensures that smaller companies have as much impact on the index's performance as larger ones, offering a more balanced representation across different company sizes.
The chart above displays the 1-year rolling correlation coefficient between the MSCI USA and the MSCI USA Equal Weighted indices. A correlation coefficient of +1 indicates a perfect positive correlation, meaning that the two indices moved in the same direction during the specified time window. Conversely, a correlation coefficient of -1 indicates that they moved in opposite directions.
The chart shows that most of the time, the two indices are positively correlated and move in the same direction. Notably, the positive correlation broke during the Dot-com Bubble preceding the 2001 recession.
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