Stocks have fallen across the board in reaction to Federal Reserve Chair Jerome Powell’s hawkish speech on Friday.
Powell reiterated his message that bringing down inflation will translate into economic pain, causing many investors around the world to worry about what these comments may mean for September’s Federal Open Market Committee (FOMC) meeting, according to Kristina Hooper, chief global market strategist for Invesco.
By mid-day Tuesday, the S&P 500 is down 1.2% while the S&P 500 Equal Weight Index is down just 0.9%. Over five days, the S&P 500 has decreased 3.5% while the equal-weight index is down 2.8%, and year to date, the S&P 500 is down 17% and the S&P 500 EWI is down 12.9%.
In the first two quarters of the year, the S&P 500 Equal Weight Index outperformed the S&P 500 by 2% each quarter and has outperformed over the trailing 12 months, as of the end of July, according to S&P Dow Jones Indices.
The first half of the year saw increased volatility, followed by a summer rally. Volatility is already ramping up again and economists warn of more turbulence ahead following additional rate hikes from the Fed.
An equal-weight strategy, such as the Invesco S&P 500 Equal Weight ETF (RSP) or the Invesco ESG S&P 500 Equal Weight ETF (RSPE), is particularly compelling in the current environment, as the strategy tends to outperform during periods of elevated volatility.
Nick Kalivas, head of factor and core equity product strategy for Invesco, said in an interview with S&P Dow Jones Indices at Exchange: An ETF Experience that the S&P 500 Equal Weight Index tends to have a down capture above one. However, in the first half of the year where a lot of volatility was observed, the down capture was actually around 50% because the correction happened largely with the big names that dominate the cap-weighted S&P 500.
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