The Skew Is Not New

Market observers have noted that the S&P 500’s performance so far this year has been dominated by a small number of technology stocks.  This observation is certainly correct, although it’s fair to question the relevance of a statistic based on fewer than two months’ data.  What’s more important is to bear in mind that this is not unusual.  For most equity indices, skewed returns are the rule, not the exception.

One technical measurement of skewness is that a distribution’s mean is greater than its median.  Unlike in Lake Wobegon, where all the children are above average, in the real world of positively skewed returns, most stocks are below average.  Graphically, there’s a long tail to the right, as pictured here:

The chart covers a 20 year period, but we don’t need long time horizons to detect skewed results.  For the S&P 500, e.g., returns have been positively skewed in 23 of the past 27 years.  Results are similar for other markets.

Why should investors care about skewness?

If skewed returns continue for the balance of 2018, it would be unsurprising to see active underperformance and equal-weight outperformance continue as well.

The posts on this blog are opinions, not advice. Please read our disclaimers.

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