Good morning & happy Monday!
“An investor without investment objectives is like a traveler without a destination.”
Ralph Seger
Today I would like to take a few moments to discuss some stock market terms many are very familiar with but that I have found can be very confusing.
In the U.S. there are 3 major markets that are quoted:
- The Dow Jones Industrial Average (more commonly known as “The Dow”)
- The Standard & Poor’s 500 (S&P 500)
- The NASDAQ
All 3 of these are what are known as indexes … a group of stocks.
It seems that the most quoted index is The Dow, although I think that is a disservice as the Dow only consists of 30 stocks.
A far broader index (and the one I will most commonly reference) is the S&P 500. The S&P 500 is comprised of 500 stocks, a far better gauge of how the market as a whole is doing is doing compared to only a 30-stock index like the Dow.
The NASDAQ consists of stocks primarily in the technology sector (think Apple, Facebook , etc.).
Now that we’ve laid the groundwork, I would like to discuss 2 further points regarding these indexes.
#1 – These indexes change with the time.
In 1980 the top 3 holdings in the S&P 500 were IBM, AT&T, & Exxon
In 2000 the top 3 holdings in the S&P 500 were General Electric, Exxon, & Pfizer
In 2021 the top 3 holdings in the S&P 500 are Apple, Microsoft, & Amazon
Think about it … the top 3 companies in S&P 500 valuation were not even in the S&P 500 when I was born in 1980. (Apple joined in 1982, Microsoft in 1999, and Amazon in 2005).
Heck, Tesla has roughly a 1.69% weight in the S&P 500 and that company was not even founded until 2003 and not added to the S&P 500 index until about 10 months ago (12/21/2020).
#2 – The weighting of the stocks in the indexes has changed dramatically.
As of last Monday (10/11/2021), the most weighted stock in the S&P 500 is Apple with a weighting of roughly 6.02%. That means that 6.02% of the S&P 500 is comprised of that one stock. In fact, the top 10 stocks in the S&P 500 have a total weighting of roughly 28% on the S&P 500. How these 10 companies stock do will have a meaningful impact on the index as a whole. The lowest weighted stock in the S&P 500 (#500) is News Corporation with a weighting of 0.0079%. If that stock has pretty dramatic movement the impact to the index as a whole will be fairly minimal.
A bit of historical perspective:
September 30, 2021 the market capitalization of the S&P 500 (total value of all S&P 500 companies) was roughly $36.54 trillion with Apple being the most valuable company with a market capitalization of roughly $1.97 trillion.
In 2000 the market capitalization of the S&P 500 was roughly $2.75 trillion with General Electric being the most valuable company with a market capitalization of roughly $475 billion.
In 1980 the market capitalization of the S&P 500 was roughly $237 billion with IBM being the most valuable company with a market capitalization of roughly $39.6 billion.
Think about this for just a second … today Apple alone is worth 8 times more than the entire S&P 500 was worth in 1980! The world sure is changing.
If this is an interesting topic to you and you’ve got 3 minutes, check out this YouTube link about the changing market … Top 10 S&P 500 Companies by Market Cap (1980-2020) – YouTube
Next week I plan on building on this topic with a discussion on diversification and the dangers of improper diversification. But for today I hope you’ve found value in a better understanding of what these indexes mean and how they change over time.
I love this stuff (and am having to control myself from making this a 10-page article), so feel free to ask any questions if you want more info on this or any of the topics brought up in these weekly emails.
I hope you have a blessed week ahead!