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B400 Market Performance Edges Past S&P 500

John A. PrestboJohn A. Prestbo

After lagging for six weeks, the Barron’s 400 Index has caught up to the S&P 500 and is now edging ahead. It’s evidence that growth is back on investors’ minds as the market moves just below recent record levels.

A chart is the best way to show how the two indexes have performed against each other. We started the chart below with the close on March 18, which is the day before the current Barron’s 400 components—companies with substantial financial strength and track records for growth—were installed during the most recent rebalance.

Except for April and early June, the Barron’s 400 trailed the S&P 500 during this period. Fears about economic growth fading worldwide and particularly about U.S. corporate sales and profit growth disappearing weighed heavily on an index known for tracking “growth at a reasonable price.” The Brexit shock pushed the Barron’s 400 much lower than the S&P 500 as analysts pondered the implications for growth in both the United Kingdom and continental Europe.

But then, after the July 4 holiday, the Barron’s 400 surged back, closely pacing the S&P 500. The market pushed higher, with both the S&P 500 and the Dow Jones Industrial Average setting new records. That rally seemed to reflect a change of heart among investors, who saw market records as fresh indications that growth was not dead and buried. In the waning days of July, the Barron’s 400 began accelerating past the S&P 500. It is too early to break out the champagne, though. Look at how market downturns snapped two previous rallies by the Barron’s 400 in late April and early June.

Still, it’s worth pausing to see how the Barron’s 400 is managing to slip ahead of the S&P 500 at this stage. As of July 22, the median stock-price gain for Barron’s 400 companies was 5.9% since March 18—130 basis points below the 7.2% median for the S&P 500. That suggests widely divergent performances going on below the surface. And a sector comparison verifies this hypothesis.

Median Price Change 3/18/16 – 7/22/16
B400 S&P 500
Consumer Discretionary 1.55% 1.41%
Consumer Staples 0.16% 8.55%
Energy 4.65% 11.76%
Financials 7.24% 6.02%
Health Care 12.90% 10.93%
Industrials 3.92% 4.01%
Materials 13.30% 8.31%
Technology 7.66% 7.40%
Telecommunications 8.05% 5.43%
Utilities 1.94% 9.52%

The Barron’s 400 median gains surpass those of the S&P 500 in six sectors, two narrowly and four by more than a percentage point: financials, health care, materials and telecommunications. The S&P 500 posts large advances in consumer staples, energy and utilities, which are much larger sectors in this index than in the Barron’s 400. It also helps explain the S&P 500’s larger overall median price increase.

Comparison of the two indexes across stock-size segments is revealing, too.

Median Price Change 3/18/16 – 7/22/16
B400 S&P 500
Mega Cap (>$10 billion) 6.14% 7.61%
Large Cap ($3 bln-$10 bln) 5.71% 1.88%
Mid Cap ($1 bln-$3 bln) 5.56% N/A
Small Cap ($500m-$1 bln) 7.71% N/A
Micro Cap (< $500 mln) -10.08% N/A

The S&P 500’s mega-cap segment, which has 396 companies (counting both classes of Alphabet Inc.), outgained the Barron’s 400, which has 100. But the leadership flips, and by a greater margin, in the large-cap segment. The equally weighted Barron’s 400 has 116 companies in this category while the market-cap-weighted S&P 500 has 106. This net advantage to the Barron’s 400 is augmented by the gains in mid-cap (at 119 companies it is the index’s largest segment) and small-cap (50 companies), where the S&P 500 doesn’t compete. The big median loss in micro-caps in minimal overall because the Barron’s 400 has just one dozen companies in that segment.

One more piece of information is pertinent, and that’s how the ratio of these price gains to earnings has changed during this period. There are two variables at work here—prices, of course, and also reported or expected earnings. The Barron’s 400 components consistently have better earnings gains than the S&P 500’s, and that fact shows up clearly in this table, where lower is better:

Median P/E Ratios 3/18/16 – 7/22/16
Trailing Forward
3/18/16 7/22/16 Change 3/18/16 7/22/16 Change
B400 17.89 18.35 2.53% 16.07 16.37 1.87%
S&P 500 20.57 21.26 3.34% 17.45 18.34 5.10%

The lower median P/E ratios of the Barron’s 400 across the board, as well as the smaller percentage changes during the period, are reflections of the index’s “growth at a reasonable price” methodology. In this period, rising earnings performance and projections largely offset the reduced value attraction caused by rising stock prices.
For the S&P 500, not so much.

For now, growth is back on investors’ radar. Those who are looking for it could do much worse than to beat a path to the Barron’s 400.

John Prestbo, senior advisor to MarketGrader Capital, was formerly editor and executive director of Dow Jones Indexes. He was also chairman of the Dow Jones Index Oversight Committee. During his time at Dow Jones Indexes he worked, along with Barron's and MarketGrader, on the development of the Barron's 400 Index. Prior to that, Mr. Prestbo worked as an editor and writer for The Wall Street Journal in various capacities, including page-one editor, commodity news editor and markets editor. Mr. Prestbo has co-authored or edited several books over the past 30 years. The most recent was "The Market's Measure: An Illustrated History of America Told Through the Dow Jones Industrial Average," published by Dow Jones Indexes in 1999 and "Barron's Guide to Making Investment Decisions" which he helped to compile and edit in 2006. Mr. Prestbo won the University of Missouri Award for Distinguished Business Writing in 1967 and the George M. Loeb Achievement Award for Business Writing in 1968. In 2007, he won the William F. Sharpe Indexing Lifetime Achievement Award. That same year, he was honored for his leadership by Dow Jones Indexes during its celebration of 10 years as a separate business unit.

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