A tale of two portfolios

Stocks had a mixed close yesterday as investors sat, watched, and waited… and sat, watched, and waited. No real news ahead of next week’s big events left investors with little conviction.

Did your train leave the station? What has been going on in the stock market for the past few months? If you base your answer on the news soundbites you may be hearing in the background or what your children and grandchildren are telling you, you might think that the stock market is BOOMING. An AI investment frenzy has sent some old favorite tech stocks into the stratosphere while some chip manufacturers have been launched well into the ionosphere (that is far beyond the stratosphere, trust me ). You may own some of those stocks, so you are happy to hear that things are good, especially in the wake of last year’s tech wreck. If you were so inclined as to check your statements (which is always recommended), you may be surprised that very little has changed in your portfolio’s value since the beginning of the year. That is because this recent hype in stocks has been very limited in scope. That is to say, in market terms, the rally lacked market breadth.

The Nasdaq 100, which is made up of the 100 largest cap and most active non-financial stocks listed on the NASDAQ, is up by +30.75%. Wanna give a guess about what the top 10 stocks, by weight, are on the index? Sure, you do. They are, in descending size (and impact) order: Microsoft (13%), Apple (12%), Amazon (7%), NVIDIA (7%), Meta (4%), Alphabet (8% combined between the 2 share classes), Tesla (4%), Broadcom (2%), and PepsiCo (2%). There you have it. Out the top 10, which represent nearly 60% of the index’s weight, 8 are in the tech-related category (sorry Tesla, I like you, but you are a car manufacturer). Of those 8 stocks,  6 of them are somehow associated with artificial intelligence (sorry Amazon, you almost made it, but you still are up by +44% year to date, so good on you).

If we look at the S&P500, a broader index, probably closer to what you own, it is only up by +11.15% year to date. Now, that is not a bad return, but it pales in comparison to the +30.75% gain on the Nasdaq, which, of course, you would much rather have. But alas, it is possible that your performance may be even lower than the S&P500’s, and you are confused… and likely, not happy about it. The S&P500, like the Nasdaq 100, is also a cap-weighted index, making it similar, but there are notable differences. First the S&P500 is purely cap-weighted while the Nasdaq factors in how active a stock is. The S&P500 is bigger, so the weights are diffused over a bigger pie of stocks. Finally, the S&P500 includes all types of stocks, including financial. Yes, there are lots of similarities between the top 10 stocks, but they are not the same, and the weights are quite different. For example, Apple, Microsoft, and NVDIA only make up ~17% of the S&P500 while the same stocks make up ~32% of the Nasdaq 100’s weight. So, clearly these indices’ year to date performances owe a lot to their tech-heavy makeup along with their associated weightings.

But what about YOUR portfolio. You surely don’t own 500 stocks (although I have seen some client portfolios which try to) and they are surely not weighted like the S&P500. Where would the S&P500 be if it were not so heavily weighted in tech? I will tell you. Only up by +2.52%! That is because Starbucks gets the same weighting as Apple, when on the S&P500, Starbucks only makes up +0.25% of the index. Do you own Starbucks? It is down by -1.29% year to date. So, you see, if you owned a lot of NVIDIA (up by +156% YTD) or Microsoft (up by +34.84% YTD), you are likely to be beating the pants off the S&P500 and you feel quite accomplished. If you don’t, I don’t want you to fret, because if you owned a lot of those 2 come-lately highflyers last year, you would have lost -50.31% and -28.69% respectively, far worse than the S&P500’s -19.44% loss. What that all means is that sometimes being diversified helps, while other times, it seems like it doesn’t. Over the long run however, diversification always wins. Don’t believe me? From 1957 through the end of last year, the S&P500 earned around 10% on average… solid, and likely much better for your digestive health!

YESTERDAY’S MARKETS

Stocks had a mixed close yesterday on very low volatility, indicating complacency, ahead of next week’s big inflation number and FOMC meeting. The S&P500 slipped by -0.38%, the Dow Jones Industrial Average climbed by +0.27%, the Nasdaq Composite Index declined by -1.29%, and the Russell 2000 Index jumped by +1.78%. Bonds fell and 10-year Treasury Note yields added +13 basis points to 3.79%. Cryptos fell by -4.34% and Bitcoin lost -2.16 %. The S&P500 ESG Index gave up -0.57%.

NEXT UP

• Initial Jobless Claims (June 3) is expected to come in at 235k, slightly higher than last week’s 232k.
• The Treasury will auction a gigantic $110 billion in 4 and 8 week bills today at 11:30 Wall Street Time.