US Stock Market Indexes can be a funny thing. As investors we need to understand what’s inside of them. Which stocks and sectors drive them higher or lower?
This seems like an afterthought in some circles, especially after the major large-cap indexes have put up nice returns the past 3 years. The S&P500, for example, was up 28%, 16% and 27% respectively in 2019, 2020 and 2021.
But at the individual stock level, it certainly didn’t feel that way in many cases.
I have a good feeling 2022 will be the opposite. I think this year, the average and median stock has a higher likelihood to outperform the major indexes, for one simple reason.
No one owns a lot of these names.
If you own the S&P500, that means only 5% of your portfolio is in Energy and Basic Materials. If you own the Dow Jones Industrial Average that number drops to under 3% (Remember they recently kicked out Exxon Mobil from the Dow – of course they did). And if you own the Nasdaq100, your exposure to Energy and Materials becomes 0.0%.
These sectors can double, or even triple and they won’t make a dent in the returns.
To take this weighting situation one step further, you can include Financials and Industrials into the mix and you’ll get some additional bifurcation in exposure.
For example, the actual definition of the Nasdaq100 is, “100 of the NASDAQ’s largest nonfinancial companies”.
So in addition to no exposure to Energy or Materials, you are by definition not getting any Financials either. And you won’t get much exposure to Industrials, to make matters worse, coming in at just 3.6% of the QQQs.
This compares to over 14% Financials in the S&P500 and 9% Industrials.
There are some major differences between these indexes.
The Nasdaq100 is almost 46% Technology. But when you add Communications (FB & GOOG) and Consumer Discretionary (AMZN) then you’re looking at over 80% exposure to this group.
And this is where we are today, with the Nasdaq finally returning to the scene of the crime from back in 2000. Here is the Nasdaq Composite Index vs the S&P500 Index. Do you think this is a logical place for the S&P500 (and more Value-oriented names) to start to outperform the Growth-heavy Nasdaq?
We talked about this earlier in the week. If rates are going higher and the bond market is going to be pushing these sectors around, we’re looking at areas like Energy, Financials, Industrials and Materials.
Many indexes don’t have exposure to those stocks.
Know what you own. This year is not last year or the prior two.
I think this year will be very different.
Oh, and by the way, Energy was the best performing sector in the U.S. for 2021. Financials did very well too. So this isn’t anything new. I think the trend is actually just getting stronger.
Are you prepared for it?
We discussed it all on this week’s live Strategy Session. Premium Members make sure to check that out here and download all the slides.
This was the first one of the year and you don’t want to miss it!
Let me know what you think!