Independent, Fee-Only Financial Advisor

Independent, Fee-Only Financial Advisor

Tuesday, July 21, 2020

Going Their Separate Ways

Every afternoon as I drive home (or, listen to a podcast after working from home!) I hear about how the "stock market" performed that day.

In the US, there are at least thirteen "stock markets" or exchanges, plus many more bank operated platforms, where stocks are traded. While stocks are traded on exchanges, they generally aren’t grouped or tracked for performance by exchange. When you hear performance being quoted, it is commonly by “indices” or groups of stocks with some defining characteristic. Popularly quoted indices are the Dow Jones Industrial Average, the S&P 500 and the NASDAQ. Each of these tracks large US companies, but each in its on way:
  • The Dow consists of only 30 stocks, hand selected by a committee in an attempt to cover the entire US economy in a meaningful way. The measurement is based on the share price of the constituent parts. That weighting is a weird feature on it's own, so a large price movement in one of the companies has an outsized impact, even if it is a smaller component.
  • The S&P 500 is generally the 500 largest stocks in. In this way, it covers about 80% of the market in the US. Stocks are weighted proportionally to their size or market capitalization. This means that the larger companies have a larger influence on the index level.
  • The NASDAQ 100 is strictly the 100 largest non-financial companies listed on the NASDAQ stock exchange. There are some limits to the how large of a weight that a single company can be in the index, so while generally the larger the company is the greater the influence, it is not a strict 1:1 correlation.
Notably, all of these indices focus on large US companies. In general, the more similarities companies have, the more correlations they will have. If everyone is excited about finding a vaccine to Covid-19 (they are), then generally all biotech companies will benefit. If the market and business climate is good for oil companies (it isn't), Exxon and Chevron will both benefit. In general, if the investing, business and economic climate is good for large US companies, then as a whole, large US companies will perform well. the Dow, S&P 500 and NASDAQ-100 indices generally rise and fall together, albeit, at different rates and with different underlying stocks and rules.

So what is happening today? It just so happens that the largest stocks in the NASDAQ index are down. While a lot of these companies are also in the S&P 500, the other sectors of the S&P 500 are doing well enough to keep it in the green. 

While the NASDAQ-100 and S&P 500 both share a lot of top companies, the NASDAQ is more focused on consumer discretionary, biotech and business technology companies. Those are just doing poorly today. The S&P 500 on the other hand has financial, energy and consumer staples which are doing particularly well today.

High growth tech companies have done very well this year, and the rest of the stock market is catching up today.