There is a lot of focus right now on the “narrowness” of the market expansion.
Written by: Benjamin Bimson CIMA® / BCJ Financial Group
Narrow leadership in stock market returns relates directly to relatively few stocks. Many times we talk about the S&P 500 because it is one of the most discussed indexes in the news. The S&P is doing great, but technology stocks are doing even better.
S&P 500 compared to the legendary FANG stocks (now Alphabet) – which are leading the market YTD
FANG stocks and technology stocks in general are doing better. On May 22, 2017, the NASDAQ 100 Index (NDX) YTD return was 17.18% and highly concentrated in 6 of the 100 stocks that make up that index. Ned Davis Research created a chart of those 6 stocks and how much of that return they have contributed to YTD. The numbers are fairly shocking.1
According to Ned Davis Research, in the time that the NDX was up 10-25%, between 2 and 4 stocks accounted for half of the gains. Additionally, in the S&P 500 (a more diverse index), there are 12 stocks accounting for 50% of the gains. In the years where the S&P 500 has been up 3-11%, a median number of 10 stocks has accounted for nearly 50% of the gains in those years.1
This is a good argument for investment strategies that use indexes to gain access rather than trying to get the correct few stocks, but today’s favorite could easily become tomorrow’s ugly duckling, and if picking stocks that always win were easy, most active mutual funds would be much better performers. The fact is, it is easy when looking back, but not looking forward. Narrow leadership on the way up might be normal, but guessing could come at a sometimes extreme cost, and could be the difference between dominating greater market returns and under performance.
1- U.S. Markets. Ned Davis Research. May 24, 2017 [5/26/17]
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