The S&P 500 set a new all-time record high this week and most media outlets are trumpeting the news as notable. It is big news, of course, except that this time the S&P 500 distorts the overall picture of equity market health. Year-to-date through yesterday, the S&P 500 (IVV) was up +5.84%; certainly, a large accomplishment given the impacts of the pandemic. However, it’s the story behind the headline that bears highlight.
As seen from the chart below, other major sub asset classes and sectors continue to struggle. On a year-to-date total return basis, small cap equities (SCHA) are down -5.26%, mid cap equities are down -4.52%, real estate investment trusts (SCHH) are down -21.20%, and the energy sector (XLE) is down a whopping -35.99% (all of the colored lines below the bold black line representing the S&P 500). Other sub-sectors including financials, utilities, and high dividend stocks are still materially negative on the year, as well.
So, what is causing the S&P 500 to look so fine while the rest of the market continues to struggle in negative territory? As I have commented in many previous blog posts, the make-up of the S&P 500 is inordinately overweighted in growth tech stocks with huge returns, including Apple (+58%), Microsoft (+34%), Amazon (+76%), Facebook (+28%), and Alphabet (+15%). The perception and reality of these large cap tech growth stocks is that they are well-positioned to flourish in a work-at-home pandemic-plagued economy. These stocks now comprise 23% of the index; their outsized mid-double digit returns causing the distortion.
Some people in the industry talk about “de-worsification”, instead of “diversification”, as a situation where a broad collection of holdings actually hurts total portfolio performance. This is certainly what we have seen this year. We do not expect this situation to continue, of course, since excesses in the broad markets (both positive and negative) always revert to the mean over time. The only question is timing.