Irrespective of your opinion about wearing a mask, all of us can now better relate with what Batman (aka Bruce Wayne) had to deal with while fighting crime in Gotham City. As we begin the last quarter of a surreal 2020, SJS feels compelled to “unmask” the U.S. stock market’s performance year-to-date, shining a light on how the returns of just five stocks are obscuring how, in our opinion, the average U.S. publicly traded company is doing.
Despite unprecedented market volatility and the resulting decline fueled by panic selling in February and March, the S&P 500 Index has seemingly fully recovered. As of September 30th, the S&P 500 enjoyed a positive return of 5.6% year-to-date. During the same time, the “S&P 495”, that is, the same index with the five largest companies removed had a negative return, -7.7%! These five companies are Apple, Amazon, Microsoft, Facebook, and Alphabet (Google’s parent).
How did this happen? Well, the S&P 500 and many market indices are “cap-weighted” meaning, the larger the company, the more “weight” it carries in the index. In fact, these five companies made up 25% of the S&P 500 as of September 30th. And these five stocks have gained 47.5% year-to-date through the end of September. That’s right, 47.5%! This remarkable performance so far in 2020 has masked the fact that the average stock is down this year!
A similar phenomenon happened in the technology sector during the dot-com era of the late 1990’s. The dot-com bubble burst, and the average investor in an S&P 500 index fund earned no return during the subsequent ten-year period. Some have called this “the lost decade.” And with these five companies trading at a price earnings multiple of 35, we are happy to be more diversified in our investment strategies than these cap-weighted indices.
While we are not predicting a crash in the five companies that have led the U.S. market’s advance so far this year, diversification remains a foundational principle of MarketPlus Investing® and is instrumental in managing future risks and reaping future expected returns. Risks include those we perceive as well as those we cannot yet anticipate. Expected returns will vary across market environments, and the SJS Investment Committee reviews future capital market return expectations in decisions about investment design and asset allocation. Just another way that we work on your behalf to help you unmask the noise of the markets, and to focus on the time-tested strategies that can help you achieve your goals.
Important Disclosure Information and Sources
Past performance does not guarantee future results. Diversification does not eliminate the risk of market loss.
Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.