The Stock Market Is Worse off Than It Looks [Chart]
I’ve got some bad news: The stock market is much worse off than you probably realize.
Without a doubt, 2020 has been a rough time to be an investor. In February, the COVID-19 pandemic sparked the fastest market crash in history, sending stocks tumbling from their peak by about 34% by the end of March.
But markets quickly snapped back higher – as of this writing, the S&P 500 is just 11% lower than it started the year.
And the financial media have been touting that fact left and right…
“The S&P 500 is about back to where it started [a year ago],” crowed CNBC last week.
Thing is, that stat is incredibly misleading.
While the S&P 500 Index itself is indeed now barely down double digits in 2020, the average stock in the S&P 500 is down almost 17% over the same timeframe.
Have a look:
The blue line shows the S&P 500 so far this year. The red line shows the average S&P 500 stock.
While the two lines tracked each other pretty closely in the early days of 2020, the spread between them has widened as the market has “bottomed.”
How can something like this happen?
The S&P 500 doesn’t represent all stocks equally. It’s top-heavy.
As a market cap-weighted index, big stocks like Apple, Microsoft and Amazon make up a disproportionate share of the index. Coincidentally (or maybe not) those are also the stocks that have been rebounding the best in 2020.
Right now, the five biggest S&P components make up about 20% of the index’s value.
That means if you don’t own the small handful of stocks that are outperforming the rest of the market right now, you’re probably doing much worse than the stats suggest.
The good news is that there’s a fix…
Just buy what’s working.
As I shared a couple of weeks ago, data from previous crises show that owning stocks that have been outperforming over the prior six months boosts your odds of a winning portfolio by about 50% in the following month.
And just to double down on the point, the three example names I gave you a few weeks ago – Nvidia (NASDAQ: NVDA), Amazon.com (NASDAQ: AMZN) and Microsoft (NASDAQ: MSFT) – are up double digits, on average, since we first started talking about them in these virtual pages.
Tech stocks, in general, are leading the market higher right now.
And those trends are likely to continue.
Owning a basket of leaders is still the data-backed way to outperform the rout in 2020.
Jonas Elmerraji, CMT