As we head into the middle of earnings season, it is important to recognize the unprecedented concentration of 5 companies that are driving returns in the U.S. stock market. The S&P 500 is the index that tracks the largest publicly traded U.S. corporations and portrays the overall direction of stocks. Media outlets report the index throughout the day, appearing to show a balanced way to announce the advance or decline of the total U.S. equity market. The problem is all companies and their influence are not created and reported equally. The S&P 500 is ‘market cap’ weighted as follows: the larger the company the most representation of the overall index they receive. The top 5 stocks make up a staggering 20% of the overall index, and they all represent the same sector of technology! (Facebook, Amazon, Apple, Google and Microsoft). To place this in perspective, the top 5 stocks in 2000 represented much more diverse sectors: GE, Exxon, Pfizer, Citigroup and Cisco Systems.
Top 5 Year to Date Performance
Facebook (-8%) Google (-5%) Apple (-4%) Microsoft (+10.5%) Amazon (+29%)
S&P Sectors Year to Date Performance
Energy (-56%) Consumer Discretionary (-42%) Financials (-37%) Materials (-33%) Real Estate (-32%) Comm Services (-29%)
Industrials (-27%) Info Technology (-23%) Utilities (-19%) Health Care (-16%) Consumer Staples (-14%)
We point this out because so much attention has been focused on the recent recovery from the March lows. Many areas of the market have not participated in the rally, dividend paying stocks had been under pressure over the last month as liquidity concerns mounted. Currently sectors representing energy, financials, industrials, and materials are all off over 20% or more year to date as noted above. These represent areas of long-term income production and an important balance to asset allocation. It’s not time to throw out diversification during a chaotic whipsaw of daily stock movement; we learned that lesson during the tech bubble peak of the past. Our approach is to own predictable income providers by blending the strategy between a balanced allocation of global stocks and bonds…not simply 5 companies in one sector.
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.