S&P 500 or the S&P 5?
Read this post to understand a little more about the equity market’s recent volatility and also, get some inside baseball on one of the common measures of the equity markets, the S&P 500.
On Thursday February 3, 2022, the Nasdaq declined more than 4% in a single day. Meta, the company formerly known as Facebook, FB, declined more than 26% in a single day. Facebook is only one of 500 stocks in the index of equities called the S&P 500, which is talked about often by us, and by the financial media.
Over long periods of time, equities provide higher average annual rates of return than other asset classes. This includes the inevitable years of decline, which number about one year in every four years. What is your prediction for the stock market for the year?
I say, it will be a good year. Statistically speaking, I will be right more times than I am wrong. And if push comes to shove, I will say it will be an average year, about 10%, plus or minus about 15%. That’s just the way it works—but that’s completely beside the point. That’s just the long-term, real-life average.
Last year, the S&P 500 index had yet another stellar year for performance. And it exceeded those average returns by a lot. But the S&P 500 represents over 500 companies. The Dow represents only 30 companies. The Nasdaq represents about 100 companies. It seems like, if you are going to look at a benchmark, you want to look at a broad array of companies—and so we look at the top 500.
But here is some inside baseball you might find interesting. Top 5 companies in the SP 500 delivered nearly half the returns of the SP500 in 2021. The top 10 companies delivered more than half.
Ten companies comprise more than 30% of the market share of the S&P 500. Two companies combine for more than 13% market share: Apple and MSFT. So, the S&P 500 is not as diverse as you might think.*
So that explains the one-day dramatic declines for February 3, 2022. The indices that we quote as measuring the market are not as diversified as we might think. It means that if one of the key players in the S&P 500 does poorly, or is faced with some sort of a government incident, or decides to spend a lot of their profits on developing the Metaverse, or whatever might be the case, then those indices may suffer more than a diversified portfolio.
What does that mean for our portfolios? It also means that a diverse portfolio did not do as well as the S&P 500 in 2021.
What does this mean for our real-life financial plans? We entered 2021 with some of the highest valuations on record. We ended 2021 and start 2022 with generally lower valuations—and higher stock prices—because companies had record profits. We can take a look at what Athena Invest, one of our key research partners sees, on their website:
…things look pretty good! With the exception of valuations, this is a normal to good time to be an equity investor. How does that sit with you?
If you are uncomfortable, please reply and we will be happy to set up an appointment with your financial planner. Or, just feel free to reach out to me directly. We are professionals and are happy to help put the recent market volatility in context of what matters most to you: your values, your goals and your relationships.
WATCH THIS TWO MINUTE VIDEO FROM OUR 2022 ECONOMIC AND MARKET OUTLOOK
* Source: My own research January, 2022.