I’m starting to have a repetitive dialogue in my client meetings and thought I would share some insight. The comments vary but the theme is the same:
“I can’t believe the market has come back this rapidly and we’re positive for the year. Is this too good to be true?”
I think there are a few easy explanations that will offer some perspective once we look under the hood. First, if you are measuring the “markets” by the Standard & Poor 500 index, you need to understand how it is constructed. It is the 506 largest U.S. companies (yes, there are 506 stocks in the 500 index) and that is based solely on market capitalization, not sales, assets, employees, revenue, profit, or any other measurement. Market capitalization is simply the total value of all a company’s stock shares. In other words, only stock value matters when it comes to S&P500 index.
As of August 11th, Apple is the largest company in the U.S. based on market capitalization, so it has the highest weighting in the S&P 500 index. If you take the total stock value of all 506 companies in the index, you can then find out what percentage each company represents. In this example, Apple represents 6.44% of the index.
At the end of 2019, AT&T had $551.67 Billion in assets, 63% more than Apple’s $338.52 Billion. Walmart had $523.96 Billion in revenue, 201% more than Apple at $260.17 Billion. But by market capitalization, AT&T represents 0.78% and Walmart represents 0.67%, far less than Apple.
So, what’s driving the market in 2020? Based on 8/12/2020 closing prices, the top 5 stocks in the S&P500 index and their weights are Apple (6.44%), Microsoft (5.58%), Amazon (4.67%), Alphabet (aka Google) (3.18%), and Facebook (2.23%). These 5 stocks represent 22.1% of the S&P500 index, therefore their stock performance represents 22.1% of what the index is doing. In this case, the worst performer in that group YTD is Google at 12.68% and the best is Amazon at 71.13%. The index is up 5.9% and these 5 stocks have added 9.7% positive performance to the index. Conversely, the other 501 stocks in the index have collectively detracted -3.8% in performance.
If you did not own those 5 stocks YTD, such as most dividend focused investors, you are likely negative for the year. If you are a diversified investor and have bonds in your portfolio, that is also a different story, as bonds have rallied this year and boosted portfolio performance.
Here are some other interesting statistics for the year when you look at sector performance:
Christina Haley O'Neal - Apr 12, 2021
Cece Nunn - Apr 12, 2021
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