2023-05-09 14:02:28 ET
Summary
- If you look at the S&P 500 or the Nasdaq YTD results, one might get an indication that things are looking quite rosy this year.
- After a tough 2022, some rebounding could be expected and welcomed despite what is expected to be a slowdown in the economy later in the year.
- However, when looking under the surface, the participation in this market is incredibly narrow, reserved mostly for just the mega-cap tech names.
Written by Nick Ackerman. A version of this article was first published with our monthly portfolio update for Cash Builder Opportunities.
So far, the major indices indicate that they are having what would appear to be a strong year, for the most part. That is aside from the Dow Jones Industrial Average, which has flirted with some negative performance in 2023. If we look at the S&P 500 and Nasdaq Composite indexes, then things look great.
This is even despite more banking calamities recently, with First Republic Bank (FRCB) being taken over by JPMorgan ( JPM ); this market continues to just run higher. In fact, the broader indexes were making or were near highs for the year at the end of April.
YTD Performance of Major Indices Through the End of April 2023 (Ycharts)
However, if your portfolio is looking more like the Dow Jones Industrial Average and less like the S&P 500 or Nasdaq, it could be for a good reason. Unless you are heavier in tech, your portfolio is probably lagging behind these sorts of results. It wouldn't even be too out of line to potentially see losses if your portfolio is tilted more toward value-oriented sectors. The sectors that performed relatively better last year are getting hurt this year.
It was after Microsoft ( MSFT ) reported that I mentioned in the main chat for CBO that while the indexes were rallying, most everything else was actually not. They reported on April 25th, and the below includes the heat map for the S&P 500. We can see that the vast majority of holdings were down, but the select few market leaders still pushed the index higher for the day.
Heat Map of S&P 500 On April 26th, 2023 (Cash Builder Opportunities Investing Group Chat)
Well, this wasn't just a one-off occurrence. In fact, an analyst noted that the top ten stocks in the S&P 500 are contributing to 86% of the overall index returns. That leaves 490 positions contributing barely anything to the overall 'success' of this year's action.
That means unless you're pretty heavy in most of the tech names, you are probably not experiencing the same sorts of returns. Here's a look at the index's top ten holdings, according to State Street's SPDR S&P 500 ETF ( SPY ) website.
S&P 500 Top Holdings (SPDR SPY)
In fact, even if you are holding within this top ten, if you aren't holding ( META ) or ( NVDA ), you're likely seeing weaker results, too. UnitedHealth Group ( UNH ), a name in our Core Income Builder Portfolio, is actually down on a YTD basis. MSFT is another Core Income Builder Portfolio, so that has helped contribute to the upside of the portfolio on a YTD basis.
Top Ten S&P 500 Names Performance Through the End of April 2023 (Ycharts)
I mention this because a lot of investors tend to focus specifically on how the S&P 500 does, but it really isn't the S&P 500... it's more like the S&P 5 mega-cap tech names as those are what is primarily driving the market. They often have over the years, but it seems even more so this year than in others.
That being said, with such a push higher in the Nasdaq 100, the one-year rolling returns are starting to climb their way back. However, that index is still off -1.66% in the last year, the S&P 500 is off -2.78% and the DJIA is up 0.51%. Small and micro caps are being left behind.
U.S. Equity Index Performance Period Ended April 30th, 2023 (Seeking Alpha)
On the other hand, it is still positive to see green in most other sectors. Even financials, energy and utilities are making their way to positive territory with only some fairly shallow losses. Healthcare is also negative on a YTD basis, but that, too, is slowly making its way to the green side. So while it has been the mega-cap tech names driving the outsized returns, we aren't necessarily seeing steep losses elsewhere. Things are holding on fairly well, in my opinion.
U.S. Equity Sector Performance Period Ended April 30th, 2023 (Seeking Alpha)
In the last month, we can see every sector was moving positively as we rebounded from the more volatile March. The VIX has actually fallen below 16 now - again, even with the latest crisis continuing to play out in the banking space.
CBOE Volatility Index As of April 30th, 2023 (CNBC)
As a way to enter positions or play the options wheel strategy, we often write puts. However, this sort of low volatility highlights why Stanford Chemist and I have been less active in terms of selling puts. The lower volatility amid a generally rising market, at least in terms of the top few names dragging it higher, means fewer opportunities out there. Of course, we still find other places worth putting capital to work, too.
Conclusion
Overall, this market has been quite perplexing. I see many negative comments from investors and the expectation for a recession by year-end or early 2024. Yet, the market remains incredibly calm. While only the large tech names are delivering most of the gains, most everything else is at least holding up relatively well as measured by the YTD sector performance. Relatively well because even the value-oriented sectors, which are lagging and negative for the year, aren't where one might expect them given the environment.
In the end, unless you are invested with a focus on these select few mega-cap tech names, chances are your equity portfolio could look more like the DJIA than the S&P 500 or the Nasdaq. The DJIA has been showing more of a struggle, swinging between some losses and some shallow gains. And that's okay because the 'market' has been anything but broad participation. With current weightings in the major indexes such as the S&P 500 and Nasdaq, it becomes less and less relevant to what most other equities are actually doing.
For further details see:
'Market' Performance Propped Up By Tech Titans With Slim Participation Elsewhere