"All animals are equal, but some animals are more equal than others."
The above quote is from the 1945 George Orwell classic book, Animal Farm. During my junior year of high school, I took a class called Modern Novel. Of all the masterpieces of literature that we read that year, Animal Farm was my favorite. It has many political and economic lessons that are as relevant today as they were then (maybe even more so). The book tells the story of a group of farm animals who rebel against their human farmer, hoping to create a socialistic setting where the animals can be equal, free and happy. Ultimately, however, the rebellion is betrayed, and the farm ends up in a state as bad as it was before. Under the dictatorship of a pig named Napoleon, we find out that NOT ALL animals are really equal.
So, what does this have to do with the stock market? The answer lies in further analysis of the construct of the S&P 500 index. Most of our clients know that this index measures the performance of the largest 500 publicly traded stocks in the United States. What many people are unaware of, is that the index is a market cap weighted index. This means that the larger the value of the company's total outstanding stock, the larger the weighting of that company in the index. As you can see from the chart below, we are now at a point in time where the five largest stocks in the index make up more than 22% of the total waiting. The remaining 495 stocks make up the remaining 78% of the index.
A number of tech stocks have outperformed the broad market for a number of years, and especially during the COVID-19, coronavirus outbreak. As people came to rely more and more on technology, these stocks far outpaced many of their non-technology brethren.
On a year to date basis, through Friday, July 16, the market cap weighted S&P 500 Index was up .95%. Over the same time period, the equally weighted index, which weighs all 500 stocks equally, was actually down -7.29% (source: Morningstar Office). As a matter of fact, just 121 of the stocks in the S&P 500 were up YTD through 6/30/20. 153 stocks were down at least 25% YTD as of 6/30/20, including 33 stocks down at least 50% YTD (source: BTN Research).
The last time the five largest stocks within the index made up more than 18% of this measurement was in early 2000 around the peak of the tech/dot.com bubble. This is purely observational, it is not a projection. However, we always pay attention to the past to better inform our future thoughts and actions.
Just like in the book Animal Farm, where we learned that all animals were NOT created equal, we now know when we look at the S&P 500 index, not all stocks are created equal. We will continue to try to keep you abreast of relevant economic and market data as we navigate these choppy and uncharted waters of a COVID world, as we all continue "Moving Life Forward" together.
Source: Charles Schwab, Bloomberg, as of 6/30/2020
© 2020 Jesse Hurst