Check this out fellas ... if the S&P 500 is being over-weighted with FAANG stocks to provide a return, an investor might conclude at least 2 things. 1) If my fund has to rely on the FAANGs to get a decent return, I might as well select a fund that provides the real deal and, 2) the S&P is perhaps not as safe from market risk (diversity and all that) as I hoped if the FAANGs get slammed. What do you think?
Investments - The Barber Financial Group .....What is Driving the Stock Market?
Dean Barber August 3, 2020
EXCERPTS …. From conversation between Bud Casper and Dean Barber … Dean: Okay, Bud, here we are, we’re having this conversation on Aug 3, 2020.
Bud: Yes, indeed.
Let’s jump up to the S&P 500, which is essentially a flat line. It’s down by 0.21% right now. Alright, what’s up at the top? I don’t think it’s any surprise it’s the NASDAQ composite. The NASDAQ composite is higher by 20%. What’s that telling us? We see a 37% differential between SmallCaps and technology, or the NASDAQ, this year in seven months. What’s that tell us?
Bud: Well, I think we have a situation where the five big companies in technology are driving the returns, both for the S&P 500 and the tech sector. It does explain what we’re experiencing at this point. If you look at it right now, the S&P 500, 25-26% of the return to the S&P 500 comes from technology, and specifically, those five companies, Facebook, Amazon, Microsoft, Alphabet, and Apple.
Bud: Yeah, from a historical perspective, if you think of the 20s, 30s, and 40s, Dean, what was the way we judged performance in the stock market? The Dow Jones Industrial Average. Why? Because we were a manufacturing economy at that time. In 1957, Standard and Poor’s came in and said, “That’s not a fair way of looking at the market today.” So, they divided the market into 11 different sectors, and they filled each of those sectors up with stocks that best represented this sector. And that was a good way of truly measuring what the broad-based market was doing.
But if I were to tell you that technology today represents 26% of the S&P 500 return, what does that tell you? The S&P has been biasing the portfolio to technology. Why would they do to do that? They’re seeing all this money coming into pension plans, IRA accounts, and individual accounts getting invested in the S&P 500. And if that were to perform equal-weighted, you wouldn’t get the returns that you’re getting out of the S&P 500 you do today.
Dean: Well, here’s why. Take a look at Figure 2 above. Figure 2 shows us the different sectors on a year to date basis. Let’s start up at the top with information technology year to date, plus 15.21%. You can scroll on down, and we only see four sectors that are in positive territory. When we get to the S&P 500, it isn’t a sector, but it’s more of a benchmark. It’s the one that’s flat. Okay, so what do we see? Consumer staples, negative. Materials, negative. Utilities, negative. Real estate, negative. Industrials, negative. Financials, negative. Down at the bottom, which shouldn’t be a surprise, is energy, negative 38%.
You see a 53% variation between the best sector and the worst sector in the S&P 500. The average of those sectors, as weighted inside the S&P 500, gives us the flat return this year. But you can the tendency to want to be overweighted in technology because that’s where the money is being made.
