Dissecting Recent Market Performance

    

Author: Adam Phillips 

Dissecting Recent Market Performance

September 1, 2020 

Less than six months removed from its historic decline in March, as of the writing of this blog, the S&P 500 has rebounded more than 55%.

Although certainly better than the alternative, many investors continue to have difficulty reconciling the stock market’s recent performance with the day-to-day realities the nation is facing. To be sure, most would not consider an unemployment rate above 10%, the polarized political climate or ongoing protests around the U.S. to be ideal conditions for the stock market.

However, rather than ask why the stock market continues to go up, we might be better off asking ourselves if our current measure of market performance is providing an accurate assessment of the broad health of the market.

Know Your Benchmark

For years, investment professionals have considered the S&P 500 to be among the best benchmarks for measuring the performance of the large cap U.S. equity market (and far superior to the Dow Jones Industrial Average which only includes 30 holdings). However, no index is perfect, and this year’s performance has exposed the shortcomings of capitalization-weighted indices like the S&P 500, where member weightings are based on the size of the underlying company.

The performance among major technology companies has been well-documented over the last several months, and for good reason. Businesses like Amazon and Microsoft have been clear beneficiaries of this year’s pandemic and have seen their stocks rise nearly 90% and 45%, respectively, on a year-to-date basis. Meanwhile, Apple recently became the first stock in the U.S. to reach a $2 trillion valuation and is now worth nearly as much as all 2,000 companies in the Russell 2000 small cap index combined.

As a result of this relative outperformance, the underlying composition of the S&P 500 looks quite a bit different than it did ten years ago. In fact, the five largest companies in the S&P 500 (Apple, Microsoft, Amazon, Facebook, Alphabet) now account for roughly 25% of the index, more than twice as much as in 2010. Although these are great companies, one must wonder if a basket that assigns one-quarter of its value to just five stocks represents an adequately diversified portfolio.

Uneven Recovery

For those struggling to understand the market’s strength these last few months, the takeaway here is that broad market gains have been driven by a minority of S&P 500 companies. In fact, even though nearly 30% of the members in the Index had recovered to within 5% of their 52-week high at the end of August, roughly 40% of constituents remained more than 20% away from this level (i.e. in a bear market).

There are different ways to interpret the wide dispersion in performance among U.S. stocks this year. On one hand, narrow market breadth can often hinder future market gains, so it will be important to monitor whether recent laggards begin to participate in the rally going forward.

On the other hand, one can argue that the fact that the market is differentiating between winners and losers of the pandemic suggests that investors are still focusing on individual security selection rather than going blindly into the stock market.

Although we maintain a favorable long-term view on equities, we acknowledge that different environments bring opportunities for some companies while creating risks for others. Since today’s laggards may be tomorrow’s leaders, we will remain committed to our focus on security and sector selection as we manage client portfolios in the months ahead.

 

Disclosures:

EP Wealth Advisors (“EPWA”) makes no representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information presented in this report. EPWA has used its best efforts to verify the data referenced. The information presented was obtained from sources deemed to be reliable. However, EPWA cannot guarantee the accuracy or completeness of the information offered. All expressions of opinion are of the author and are subject to change without notice.

Past performance is not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment or strategy, or product made reference to directly or indirectly, will be profitable or equal to past performance levels. Future financial conditions and events can never be accurately predicted. No analysis, plan, or report has the ability to accurately predict the future.

Information presented is general in nature and should not be viewed as a comprehensive analysis of the topics discussed. It is intended to serve as a tool containing general information that should assist you in the development of subsequent discussions with the appropriate professional(s). Content does not involve the rendering of personalized investment advice nor is it intended to supplement professional individualized advice. Always consult a professional Financial Advisor before implementing or applying any of the approaches or strategies made referenced to directly or indirectly here.

Any direct or indirect references to investment allocation, specific securities, security sectors, or any investment vehicle(s) should not be taken as a recommendation or solicitation to buy or sell a particular security or invest in any specific investment strategy. There is no guarantee that any of the information or investment strategies discussed will be suitable or profitable.

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Hiring a qualified advisor and/or diversifying your portfolio do not guarantee investment success and does not ensure that a client or prospective client will experience a higher level of performance or results. No guaranty or warranty is made that any results, projections, or other information being represented in this presentation will be met or sustained.

All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals, and economic conditions, may materially alter the performance of your portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client's portfolio. There is also no assurance that a portfolio will match or outperform any particular benchmark.

EP Wealth Advisors, LLC is a registered investment adviser with the U.S. Securities and Exchange Commission (“SEC”). Registration with the SEC does not constitute an endorsement by the SEC, nor does it imply that EP Wealth Advisors Inc. has attained a certain level of skill or ability

 

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