Market Update November 2021 – Index Math

CAPITAL MARKETS

The relentless climb higher in the US stock market continues to march on.  Not that it hasn’t been tested since the pandemic selloff, but it has weathered the budding storms and found its way to higher highs.  And all sectors of the S&P 500 Index have posted gains since March 2020, although the magnitude has differed quite significantly.  The chart below illustrates the impact of the uneven experience over time within the broader market.

But this isn’t a chart of performance.  Rather, it looks at each sector’s weight (i.e., significance) within the S&P 500 Index over time.  And it’s to be expected that these weights will vary as companies and sectors move in and out of favor.  But what stands out in this chart is the sharp rise in the significance of the Information Technology sector since 2016.  Following the GFC (2007-2009 great financial crisis) this sector hovered around 16%.  But entering 2017, as the chart shows, the sector’s significance ascended quickly and now represents nearly 30% of the index.  Is this a result of the evolution and growth of global business and markets?  Or might it be a signal of concentration and heightened risk?

In addition to the chart’s example, this same condition of growing prominence has also occurred with individual companies in the S&P 500 Index.  Looking at each year from 2009–2016, the year-end cumulative weight of the five largest companies hovered around 11%-12% of the index.  Since that time the five companies having the largest weights in the index has grown annually and now accounts for over 22% of the index.  Those companies comprising this group each year represent multiple sectors and tend to vary somewhat year-to-year.  But the current members have held their positions since 2019, represent three sectors and are not surprising: Microsoft, Apple, Alphabet (Google), Amazon, and Meta Platforms (formerly Facebook).

Seeing the rising influence of a sector or a group of prominent businesses may suggest a number of opportunities or risks.  And monitoring both the Information Technology sector and the cohort of largest S&P 500 Index members may help clarify where opportunities and risks may lie.  But it is likely to be much more nuanced than simply tracking how they perform.  Will they lead the market directionally?  Or will investors look to remain invested and begin to rotate towards other opportunities available at lower premiums?  Maybe we’ll find the answer to the old question:  Is it a “stock market” or a “market of stocks”??? 

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This information has been prepared by QA, is provided for informational purposes only and does not constitute investment advice. It contains general information, is not suitable for everyone and is subject to change without notice. The views and opinions expressed in this report are solely those of QA and are current as of the date of writing.  While the content is provided in good faith to provide a general commentary of current market factors and conditions, the views and opinions expressed are limited in scope and QA makes no representation or warranty as to the accuracy or completeness of the information provided. Past performance of the global investment markets is not a guarantee of future results.

The index performance results referenced in this report represent past performance and are not a guarantee of future performance. Investment returns and principal value will fluctuate and are subject to market volatility, so that a client’s investment, when sold, may be worth more or less than the original cost. Indices are unmanaged and investors cannot invest directly in an index. An index’s performance does not reflect the deduction of transaction costs, management fees, or other costs which would reduce returns.

The S&P 500 Index is a stock market index based on the market capitalizations of 500 large companies having common stock listed on the New York Stock Exchange or the NASDAQ Stock Market.  For more information regarding this index, please refer to the sponsor website at www.standardandpoors.com.

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