The Concentrated Equity Market Continues

Article by: Brad Eaton

Vice President, Investment Services

As we head through the final turn and into the home stretch of 2023, it’s worth discussing a question that has been on the minds of many investors. During a year in which the S&P 500 Index is up (approximately 9.50% year-to-date), why are some of the stocks in their portfolios down in value?

It’s easy to point out that just because the “market” is up, that doesn’t necessarily mean that all stocks are up. Digging in further, though, the answer to this question is quite complex.

So far, 2023 has been a year in which the S&P 500’s return has been extremely concentrated. That is, that a relatively small number of stocks are responsible for much of the index’s return. What makes this possible is that the S&P 500 is a market cap-weighted index. In other words, companies with larger market capitalization make up a greater portion of the index (unlike an equal-weighted index, where each company is equally represented despite its size).

Anytime the financial markets experience periods of volatility or the economy is at risk of (or in) a recession, the discussion of gold begins to heat up.

It’s always important to understand the context in which someone is considering the purchase of gold. Does that individual perceive gold as a store of value during times of inflation or economic crisis? Are they concerned about financial and/or political instability? Or…do they see value in gold as a long-term investment? Usually, it’s one or a combination of these.

Earlier this year, stock analyst Michael Hartnett came up with the name “Magnificent Seven” to describe a group of some of the largest, top-performing tech-centric companies.

Microsoft (MSFT), Amazon.com (AMZN), Meta Platforms (META), Apple (AAPL), Alphabet (GOOGL), Nvidia (NVDA) and Tesla (TSLA) comprise this list. And with a combined market value of more than $10 trillion, these companies constitute more than 30% of the entire S&P 500.

The market continues to be faced with several headwinds…rising interest rates, supply chain issues, and higher-than-normal inflation, just to name a few. These conditions have had a negative impact on certain types of stocks. Banks and companies that pay high dividends (such as utilities) are prime examples. However, because these companies have lower market capitalizations, their performance will have a lesser impact on the total return of the S&P 500 Index.

🎧 Resource: [Podcast]

🏆 The Secret to Winning in the Stock Market 🏆

Given the sheer size of the “Magnificent Seven” companies, we can see how their strong performance year-to-date has “masked” a market that has otherwise had very mixed results.

Because other stocks have not produced similar returns, it does not mean that they are bad investments. It simply means that conditions may not be favorable for them at the present time.

As always, we are reminded that diversification is a critical component of a successful investment strategy. If you have any questions about the benefits of diversification on your investment portfolio, please reach out to your planner.