The landscape of the equity market during the years 2018 to 2020 was marked by what financial analysts have termed the ‘reserve scarcity period.’ This was a time characterized by tighter monetary policies, leading to fewer reserves in the banking system which had a discernible impact on various financial indices. To better understand the performance of equities during this window, a close examination of index returns is crucial.

During the period from October 24, 2018, to January 8, 2020, when reserve scarcity was most acute, there was a clear outperformance in certain equity indices. The SPX, which tracks a broad range of large-cap U.S. stocks, delivered a total return of 22.47%, and when annualized, the return stood at 18.27%. This robust performance underlines the resilience of large-cap stocks even when monetary policies are restrictive.

On the other hand, RTY, the index known for tracking smaller publicly traded companies in the U.S., posted a total return of 13.27% and an annualized return of 10.86% in the same period. Although lower compared to SPX, these figures indicate a considerable return, potentially reflecting the agility of small-cap companies to navigate the economic conditions.

The SML index, which follows the performance of small-cap equities, recorded a total return of 10.37% and an annualized return of 8.51%. This suggests that smaller companies, while they did face challenges, still managed to yield positive growth for investors over the reserve scarcity period.

In contrast, during a less stringent phase of reserve scarcity from March 20, 2019, to November 5, 2019, the SPX total return moderated to 8.94%, with an annualized figure of 14.69%. The RTY and SML indices reported lower total returns of 3.01% and 4.71%, and annualized returns of 4.85% and 7.64%, respectively. These figures underline the sensitivity of market returns to the prevailing monetary conditions.

It’s noteworthy that despite the financial stress during the reserve scarcity period, equity markets displayed an ability to generate positive returns. Large-cap indices, in particular, seemed to be more insulated from the tightening of monetary policy, potentially due to the stability and resources that large companies often have. Conversely, small-cap indices faced more significant headwinds, as these companies might have limited access to capital during times of reserve scarcity.

For investors and market analysts alike, these return profiles underscore the importance of understanding how monetary policy can influence equity market performance. They also highlight the need for a diversified investment approach that considers the variable impact of economic conditions across different market segments.

While reserve scarcity presents challenges, it does not necessarily preclude the opportunity for positive equity index returns. The variability across different indices during such periods further emphasizes the need for nuanced and strategic investment decisions to optimize portfolio performance.