Published Friday, August 28, 2020, 8:25 PM EST
The Standard & Poor's 500 (S&P 500) stock index closed Friday at a new all-time high for the second week in a row, as the two worlds of the S&P 500 and the real economy grew further apart.
FAANGM -- Facebook, Amazon, Apple, Netflix, Google, and Microsoft -- led the recovery, the rest of the economy was on another planet.
According to Craig Israelsen, Ph.D., who teaches portfolio design to financial professionals, the largest 25 stocks in the S&P 500 represented 42% of the cap-weighting of S&P 500 index, as of August 21, 2020; the smallest 25 companies in the S&P 500 represented 0.3% of the performance of the index. The terrible losses year-to-date on the smallest 25 stocks are not influential in the market-cap weighted S&P 500 index, but they reflect the world of pain in the real economy.
Of the 500 stocks in the S&P 500, 294 had a negative return through last Friday, Israelsen said. The average loss year-to-date return of the 294 companies was -24.1%.
The S&P 500 stock index closed Friday at 3,508.01, a new all-time high, surging +3.21% from last Friday. It's +44.23% higher than its March 23rd bear market low.
As the S&P 500 breaks records, it's prudent to remember that the S&P 500 is not the real economy. The disconnect between the market-cap weighted S&P 500 and the broader economy is one of many anomalies caused by the Covid shutdown and recovery.
The bottom line is that the FAANGM stocks are not trading at outlandish valuation levels, not even close to the 1999 tech-bubble. At the same time, the performance of the S&P 500 is not reflecting the broad economy's pain. The two things are both true as the economic recovery from the pandemic, haltingly, has progressed.
Stock prices have swung wildly since the crisis started in March and volatility is to be expected in the months ahead.
The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is a market-value weighted index with each stock's weight proportionate to its market value. Index returns do not include fees or expenses. Investing involves risk, including the loss of principal, and past performance is no guarantee of future results. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted.
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This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete, and is not intended to be used as a primary basis for investment decisions.
This article was written by a veteran financial journalist based on data compiled and analyzed by independent economist, Fritz Meyer. While these are sources we believe to be reliable, the information is not intended to be used as financial advice without consulting a professional about your personal situation. Indices are unmanaged and not available for direct investment. Investments with higher return potential carry greater risk for loss. Past performance is not an indicator of your future results.
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