S&P 500 Is Not What It Seems
- Marcus Brookes
- 17 September 2020
- 5 mins reading time
Stocks in the US seem to have been defying the strains of the lockdown and hitting new record highs. Companies such as Tesla, the electric-car maker, have rocketed as increasing numbers of investors appear to have substantially increased their holdings of US stocks in order to benefit from the apparently limitless gains.
We have held a rather more cautious view, and for good reason.
The S&P 500 is one of the world’s most significant stock indices. It tracks the overall performance of 500 of the biggest companies in the US, the world’s largest economy. It follows a larger number of companies over a broader range of industrial sectors than either the traditionally focused Dow Jones Industrial Average or the technology heavy Nasdaq Composite.
So if the S&P 500 is rising, the US corporate environment must be blossoming despite the lockdown hardships, right? Wrong.
The S&P 500 has been propelled upwards largely due to a very small number of very big technology stocks doing well during the lockdown as people increasingly turn to online services.
The chart shows the performance of the S&P 500 since the beginning of 2015. By the beginning of 2020, the index had risen 58%. Despite the sharp fall in March, it had recovered to be even higher on 10 September 2020: 65% higher compared to its price at the beginning of 2015.
But take out Alphabet (the owner of Google), Amazon, Apple, Facebook, Microsoft and Netflix, and it’s a very different story. By the beginning of 2020, the S&P 500 minus those six, achieved an impressive but lower 48% gain. However, by 10 September, that gain was down to 43%. In other words, without those big six posting the huge gains that they have, the S&P 500 would still be below its pre-Covid price.
This presents a couple of important points for investors. Firstly, don’t be swept up by the hype. Very often when everyone else is buying, it can be a time to sell or stay put. The sharp falls in technology stock prices over the past fortnight are likely to have been very costly for investors who bought technology stocks in recent weeks.
Secondly, there can be more to stock price rises than might appear immediately obvious. As the lockdown drags on and takes its toll on companies’ sales and profits, we are looking beyond the immediately obvious to new opportunities that could serve us well in the months and years to come. These include companies that might have performed poorly this year, but which have low debt burdens, good cash-flows and a positive outlook for the post-Covid era.
In short, our investment decisions are driven by our own research and analysis, and not by the herd mentality.
Any views expressed are our in-house views as at the time of publishing.
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In preparing this article we may have used third party sources which we believe to be true and accurate as at the date of writing. However, we can give no assurances or warranty regarding the accuracy, currency or applicability of any of the content in relation to specific situations and particular circumstances.
Forecasts of future performance are not a reliable guide to actual results in the future; neither is past performance a reliable indicator of future results. The value of investments, and the income from them, may fall as well as rise and cannot be guaranteed and the investor might not get back their initial investment.
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