The performance of the three major indexes has diverged significantly this year. Will the high-flying Nasdaq be able to maintain this improbable rally?
Let’s look at the three major indices performance year-to-date. The Nasdaq (NASDAQ:QQQ) is up 10% for the year and was fresh off a new all-time high earlier in the week. In contrast, the S&P 500 (NYSEARCA:VOO) is down 5% and the Dow Jones (NYSEARCA:DIA) is down 11%. If you’re not used to these three old friends being so far apart, it’s because they usually aren’t. The Nasdaq is the furthest it’s been from the Dow and S&P since 1983, and the current gap between the latter two is the biggest since 2002.
So what has caused such a divergence?
The power of Big Tech
A lot of credit for this improbable rally can be attributed to the big tech stocks aka FAAMG aka FAMGA aka your new supreme overlords. Investors flocked to the relative safety of these stocks as blood began to fill the streets and they have delivered. Let’s take a look at their performance since their respective March lows:
- Apple (NASDAQ:AAPL) up 60%
- Microsoft (NASDAQ:MSFT) up 46%
- Amazon (NASDAQ:AMZN) up 63%
- Facebook (NASDAQ:FB) up 60%
- Google (NASDAQ:GOOG) up 36%
For a trillion-dollar company to be up 36%, adding only $260 billion in market cap in the space of 4 months and bringing up the rear is a testament to the strength of this five-piece. According to my quick back-of-the-napkin calculations, the quintet of capitalism actually added over $2 trillion in market cap between them since March.
Considering that of the 30 companies which make up the Dow Jones only two from above make the list, it’s clear to see why the index is trailing. Yet the two in question, Apple and Microsoft, actually account for roughly 35% of the index. Even though it’s missing out on the performance of three high-flying mega-caps, it should still be propped up by the strength of the big two, right?
Wrong.
The index is weighted by stock price rather than market cap, meaning that $1.5 trillion Microsoft has roughly the same influence as $320 billion Visa (NYSE:V) or $68 billion Goldman Sachs (NYSE:GS). And even though Apple is 10 times the size of McDonald’s (NYSE:MCD) it only has twice the sway in the performance of the Dow. For a more detailed rundown of the index, check out the difference between the Dow Jones and the S&P 500.
What about the S&P 500?
While the standard-bearer for the market as a whole has fared better than the Dow, the S&P 500 is still trailing the high-flying Nasdaq significantly year to date. Even though it includes the five horsemen of the techpocalypse, they comprise roughly 20% of the S&P while they make up nearly half of the Nasdaq 100. Nasdaq’s concentration on the technology sector has meant it has been riding at the crest of the wave of this rally. Lockdown conditions have fast-forwarded the digital transformation of both businesses and individuals significantly, and those future-relevant businesses that provide for this have benefitted massively.
Stealing a quote from myself in the article linked above: “The breakdown of sectors within the index mimics that of the U.S. economy, showcasing a fair representation of the market’s performance across all industries and intrinsically linking itself to the performance of the market as a whole.” (Well said Mike. Thanks Mike.) In doing so, the index is carrying the weight of the struggling consumer discretionary and financial sectors, even though the high-flying technology and healthcare sectors are its two biggest components.
There are also the restrictions that the S&P applies to any potential company of the index. Each new entrant must be profitable for the past 4 quarters, and at least 50% of its assets and revenues must be located in the U.S. This has discounted three of the Nasdaq 100’s best-performing stocks this year: Zoom (NASDAQ:ZM), Tesla (NASDAQ:TSLA), and MercadoLibre (NASDAQ:MELI).
Moving forward, it’s imperative to learn and consider the differences between the three major market trackers. While it’s easy to lump them in together as they’re always presented as a three-piece, there are significant disparities and these should impact any potential investor’s decision, especially for those passive investors who rely on index investing.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.