2020 was a year of two reversals for the market. First, equities recovered from the depths of March to finish the year strongly, and second, smaller-cap and value stocks staged a roaring comeback in the final quarter.
We can better understand the second reversal by analyzing the market’s distribution of returns and the performance of stocks relative to the index as a whole. Exhibit 1 illustrates this for the S&P 500® for the past 20 years. Of the 980 stocks that were in the index during this period, only 211, or 22%, outperformed. When only 22% of the stocks beat the market, stock picking is hard, underscoring the persistent underperformance of most active managers.
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